What Now for Vodafone?
By Carlo Longino, Tue May 24 20:45:00 GMT 2005

No longer a giant acquisition machine and faced with saturating markets and ever-tougher competition, the company sees slowing growth and falling profitability.

Vodafone released its results for the last fiscal year today, but investors focused on the company's cautious outlook for the current year, where it said EBITDA earnings would be flat or very slightly lower due to increased competition in its key markets.

The world's biggest mobile operator is in a bit of a bind. Its growth over the last decade was driven by major acquisitions -- acquisitions which are still weighing on the company's results -- but as its major markets become saturated, organic growth becomes more difficult. Poor results from Japan, where Vodafone lost 158,000 customers in the year, also weighed on results.

3G subscriptions will be a significant figure to watch over the next year. Vodafone says it now has 2.4 million 3G users, with more than 10% of those on data cards. But more importantly, the company says 3G users have a 61 percent higher ARPU over 2G users. There simply weren't enough 3G subscribers, though, to prevent slight ARPU drops in the UK and Germany, so Vodafone will need to make a major push over the next year to drive users to its 3G services.

Japan remains a sore spot for investors and analysts, many of whom had an expectation that Vodafone's buyout of J-Phone would let it act as an incubator for advanced services on the company's other networks around the globe. While Vodafone was able to incorporate a lot of knowledge from Japan into its Vodafone live! service, the way Vodafone KK has been squarely beaten by NTT DoCoMo and KDDI in the country's move to 3G doesn't instill a lot of confidence. Execs say it will take another year to turn the business around, and to do so it will improve network quality, content and services, but they didn't offer any specifics. The handsets that Vodafone launched in Japan last September don't look like they've had much effect, so the operator needs to have something far more substantial up its sleeve to turn things around.

Vodafone is making a return to the familiar territory of acquisitions, but on a scale nowhere near as big as the giant purchases it made several years ago. It's already bought assets in Romania and the Czech Republic, and is looking at other targets in Eastern Europe, an area still ripe for subscriber growth.