The last time Mobile spoke to Vodafone’s UK CEO, Nick Read, he revealed that he had just entered a landmark deal with Orange to share the cost of building and maintaining the network. The previous time we spoke, he announced his decision to cut out Carphone Warehouse from Vodafone contracts.
Now, sitting in a small room on the seventh floor of the Goldman Sachs building on Fleet Street, Read reflects on his moves over the last year and reveals why he has been personally preoccupied with the business of music and internet on mobile phones.
Our interview coincides with O2 revealing that it is going back in with Phones 4u, having revealed in February that it would only use Carphone as an independent chain. It led to a severely weakened independent channel, following Vodafone pulling out of Carphone in October. Has that plan crumbled by O2’s move back to Phones 4u?
‘All operators keep channel strategy under constant review and I’d suggest that O2’s reconsideration of Phones 4u shows how successful Vodafone and 4u have been.’
Read appears keen to dispel suggestions that Vodafone will be back in with Carphone given the wholesale deal the two companies signed last month. ‘We have been pleased with the commitment shown by 4u over the last year and we wanted to continue with this success. The customers that 4u attracts are different to those who visit a Vodafone store, so it gives us reach to another group of customers. The wholesale deal with Carphone is entirely separate from our retail activity. This is about a different pricing model and reaching a different kind of customer that will complement our own existing base and provide us with incremental growth.’
Read points to Vodafone’s standing in the operator league to defend suggestions that the operator has lost customers as a result of cutting out Carphone. ‘We’re number one in terms of revenue market share, number one in post-pay market share (number of customers and revenue), number one in the enterprise market and number one in EBITDA.’
Vodafone has recorded 1.8 million net new customers from September 2006 to September 2007; more, Read claims, than O2, T-Mobile and Orange put together (3’s results are yet to be seen).
There is one statistic that Read is particularly proud of, one that appears to be the cornerstone of Vodafone’s entire strategy: industry-leading churn at 15.3% on contract. To put that in context, he says, O2 is some way behind on 20.5%, while Orange and T-Mobile lag further behind with 22.7%.
‘The cost of holding onto customers is a lot less than chasing new ones.’
And he’s not finished. The recent MusicStation deal with Omniphone, pinched under Carphone’s feet, and new plans to introduce revenue share with manufacturers are part of a strategy to keep pushing down
Vodafone has been commercially successful because of its low churn, and it has also enabled Read to make big shifts in strategy.
However, looking at Vodafone’s recent performance, margins have also been trimmed under Read’s stewardship; not exactly part of the stellar performance then. He acknowledges the drop in margins, and appears to point the finger at T-Mobile.
‘The UK is a low margin market – the lowest in the Vodafone group. But it’s the same for everyone.’
It has continued to drop, but how much further will margins drop amid the competition?
‘I wouldn’t be so bold and say prices have hit the floor. [But] given the level of capital intensity, you will see less price degradation and more around proposition plays.’
‘They didn’t think we would respond’
The slide in margins for operators was kick-started by T-Mobile’s amazing value proposition with Flext in early 2006, with more minutes and texts given away for a lower price than anything else on the market.
‘With Flext, they came in, dropped the price and thought we wouldn’t respond. We responded. They didn’t gain market share and took a hit on margins. Now they’ve had to put up prices to recover that margin.’
Vodafone’s own margins have gone down to around 27%. Read’s plan was to compete on price in the short term, resulting in the inevitable margin loss, but come back with stronger services to keep customers loyal. He says it has been done by investing in customer services, handset exclusives, customer feedback and putting more thought on encouraging customers to use services.
Read tries to warn off his rivals from going down the price route. ‘Someone might be desperate for numbers, and have one of those irrational moments... But my point is if anyone thinks that just by dropping price they will take share from us, I WILL respond. I WILL compete, so they won’t be getting an advantage on pure price.’
Asked if he is just saying that to keep prices up, he says: ‘No. I absolutely mean it.’
Read says he isn’t worried about the impact on Vodafone’s margins. ‘I could pick a number of our competitors who constantly have to go into the indirect channels, spike their volumes with high commissions that hits them. I don’t have to do that.’
Internet is ‘the most exciting development’
Despite the competition and price pressure, Read says all the networks have reported relatively strong quarters in terms of revenue. ‘It tells me non-voice services are taking off and the UK is leading that. My data revenues are 25% of the total. It is the highest of all Vodafone’s European operations.’ There are 10 million page views per week on Vodafone, Read claims.
Mobile internet bundle deals, Mobile TV, MusicStation and Google searches among Vodafone customers are soaring, according to Read. ‘It is the most exciting development in the industry.’
Consumer interest in mobile internet has appeared to hinge on four factors: price clarity on data bundles; network strength; restrictions on where consumers could go on the internet and handsets that made the experience possible. Why has the industry been so slow to respond to these issues?
Read says the big change in his opinion is operators opening up the so-called ‘walled garden’. Wasn’t Vodafone the worst offender with its Live! service?
‘We weren’t trying to control, but package things to make it easier to use. Obviously, in doing that there were restrictions. More recently, me and a number of the management have been saying, “we need to open this up” to liberate mobile internet.’
So why h