Global mobile giant Vodafone announced plans to buy Cable & Wireless (C&W) for just over £1 billion in April.
Whilst C&W has a significant international presence, we believe Vodafone’s interest lies primarily in C&W’s assets and capabilities in the UK. The C&W acquisition will double the size of Vodafone’s enterprise division, will strengthen commercial relationships with key corporate and Government clients and will provide increased capabilities in the ICT space.
Moreover, the acquisition will complement Vodafone’s own mobile network with more than 20,000 km of fibre-optic infra-structure within the UK. By extending its own fiber network, Vodafone UK will avoid paying transmission fees which according to Sanford C. Bernstein analysts could total more than £200 million a year.
Whilst offering enterprise integrated services, increasing ICT capabilities and lowering transmission costs might seem logical enough reasons for the acquisition, we believe there are more strategic reasons for this move.
The three real reasons why Vodafone bought C&W
Reason #1: To manage its mobile data growth: The world is witnessing an unprecedented explosion in mobile broadband usage on the back of new superfast technologies (HSPA+, LTE). According to Cisco, Global mobile data traffic is expected to increase 18-fold between 2011 and 2016.
The mobile data explosion is a double-edged sword for wireless operators (and Vodafone UK is no exception): their ‘pipes’ will continue to be used, but at the same time current wireless technologies (such as HSPA/LTE) may not be the most efficient medium to deliver the service. The naked truth is that fixed technologies deal much more efficiently with scale than mobile technologies.
Why? This is ultimately based on key differences between fixed and mobile data economics:
• Density: While 3G base stations can only deliver high speeds (3-5 Mbps) at very close distances, FTTH can today deliver 1Gbps or more with almost no degradation due to distance. Moreover, the coverage area of a 3G base station actually shrinks as the number of simultaneous users increases (a phenomenon called ‘breathing’). As the scale of mobile broadband usage goes up, the average individual cell site coverage will tend to shrink, which means more sites and more CAPEX will be required to cover the same areas.
• Spectrum: In mobile technologies data eats through spectrum capacity far faster than voice, making spectrum a key (and scarce) asset for wireless operators. Fixed technologies however have a major advantage as fibre-based transmission solutions are easy to scale and can provide almost any amount of bandwidth required.
This ‘asymmetry’ in data economics together with the spectrum and CAPEX constraints suggest the only way mobile operators will be able to serve the expected demand will be by relying (at least partially) on fixed technologies (FTTH/GPON, WiFi offload, microcells). Going underground may be a necessary move for mobile operators who want to live in the ‘cloud’.
In the UK all 4 MNOs are currently operating 3G in the 2.1 GHz band where, compared to lower spectrum ranges, it is significantly more expensive to provide mobile broadband coverage over a given geographic area. However, Everything Everywhere controls 2x60 MHz in the lower 1.8 GHz range and could convert this spectrum range into 3G, thus gaining a relevant cost advantage over Vodafone UK and O2 UK. And that is why traffic offloading becomes particularly critical for Vodafone UK and O2 UK. In comes C&W.
The C&W acquisition could give Vodafone UK (25% market share in the mobile market) the needed competitive lever to continue its data-intensive SuperNetwork strategy and challenge both Everything Everywhere’s and O2 UK’s market leadership (35% and 29% market shares respectively).
How? • On the one side, Vodafone UK will be able to leverage its business footprint to offload mobile traffic onto WiFi hotspots and microcells in office parks, business buildings and public areas at almost no additional cost. This is a substantial advantage when compared to O2 UK, who despite having similar spectrum will face significant challenges in replicating Vodafone UK’s data intensive strategy without access to a fibre network.
• On the other side, Everything Everywhere will have a bigger challenge to manage the data boom. Despite controlling wide 1.8 GHz spectrum, it is currently being used for 2G – this means that to meet the mobile data demand the operator will need to engage in a substantial re-farming exercise to use this spectrum for 3G and/or to secure the upcoming 2.6 GHz award (LTE).
Reason #2: To re-sell transmission capacity to other mobile data providers
The expected future data demand will require substantial amounts of transmission capacity. Besides providing Vodafone UK with significant savings on this front, the acquisition of C&W will allow for 2 other key benefits:
First, the C&W acquisition will give Vodafone UK a future-proof technical and economical solution for transmission, through a fibre network with one of the broadest reach in the UK, which will also allow for fast deployment of microcells and WiFi hotspots.
Secondly, Vodafone UK will be well positioned to capture the value in fast growing mobile data segment – even the share of growth captured by other operators: C&W’s network could be used to offer offload wholesale solutions to competitors, which would allow Vodafone UK to maximize its share of the transmission business.
Reason #3: To build up its ICT capabilities
Why is Vodafone interested in building up its ICT capabilities? In connection with the expected data traffic growth, ICT will be a key driver to secure the positioning in both the consumer and enterprise & Government segments. ICT will drive new services (e.g. cloud, smart city, smart campus/office/gated community) which will develop the connectivity business further and increase the number of high speed connections and share of traffic. ICT is not so much about increasing revenue but more about driving the adoption of super-fast connectivity and cloud services across enterprise and consumer segments.
Building these capabilities organically has proven very challenging for operators, forcing them to either partner with global players or acquire local companies with the required skills – skills that C&W partially brings to the table for Vodafone.
In summary - Building up capabilities for the hyper-connected cloud-enabled world
In a data-hungry, OS-driven, cloud-enabled world, only wireless operators with significant fibre-based fixed assets to manage wireless data growth, provide future-proof transmission, and drive connectivity business through ICT will have the opportunity to sustain long term competitiveness and challenge existing market structures.
Following this Vodafone move, we may see more M&A activity in highly competitive mobile markets where fixed assets seem to have become critical to sustain long term data strategies.
By Beltram Simo, principal, Delta Partners, and Joao Sousa, partner, Delta Partners