Vodafone Takes Large Write Down

Vodafone Takes Large Write Down

Last week Vodafone Group took a £5.9 billion write down on its embattled Spanish and Italian operations. The loss dragged Vodafone, the world’s second-largest operator, into a net loss of £1.98 billion for the six-month period ending 30 September. During the same period the previous year, it had posted a net profit of £6.68 billion. The drastic reversal was due to heavy discounting in Southern Europe, where the provider saw an 11 percent second-quarter decline in revenues from voice, messaging and data. The current write down follows other similarly sized write downs in recent years tied primarily to the difficult economic conditions prevalent across large swaths of Europe. In total, the global operator’s write offs over the past 4 ½ years have amounted to a staggering £24.3 billion (US $38.6 billion).

Tarifica’s Take

Vodafone’s striking loss illustrates plainly the vulnerability of mobile operators to macroeconomic conditions. The financial situation in Southern Europe has placed substantial downward pressure on prices for the basic core mobile services of voice, text and data, and Vodafone was forced to grant material discounts in those markets to avoid losing subscribers. Vast and rapid as the nearly £6 billion loss was, it was surely preferable to the even worse prospect of the subscriber base crumbling under the onslaught of steep price cuts from other competitors facing the same unappealing economic situation.

If a giant such as Vodafone is not immune, then how much more precarious is the position of most mobile operators? We would argue that basic mobile service has become, by this point, essentially a commodity item for which price is one of the main differentiating factors – if not the primary factor. As the dramatic Vodafone write down reveals beyond doubt, there is no “moat” surrounding the mobile industry. Even LTE will become commoditized at some point down the road.

In our view, the only way to build a moat in the future is for operators to directly provide value-added products/services – including handsets, cloud computing and high end business solutions – that elevate them above the status of mere merchants peddling a commodity. A bad economic environment, troubling as it may be, only accentuates the problems facing mobile operators. It is not the cause of those problems, which are industry specific, and which brings us back to our basic long-standing contention that providing enhanced services isn’t just the smart way to go, it is the only way to go.