Carrie Pawsey, David James, John Delaney, Mark Main, Michael Philpott
Vodafone and BT strengthen their wholesale relationship
Vodafone announced this morning that it has reached an agreement with BT Wholesale, for a deal will allow Vodafone to offer its own branded broadband services. Vodafone has yet to announce any tariff packages, and services are expected to be launched by the end of this year. The announcement to offer both mobile and broadband services will mean that Vodafone will compete with O2, Orange and Virgin in the increasingly competitive bundled services market.Comment: In the early days of its empire, Vodafone's policy was to exert strong central control over its national operating companies. These days, though, the prevailing philosophy seems to be moving towards 'think global, act local'. This announcement about how Vodafone intends to enter the UK market for broadband internet access is an example of this trend. Vodafone announced in May that it would be moving into the ISP business on a global basis. The UK is the first operating company to announce details of its plans, and those plans turn out to be tailored to the peculiar circumstances of the UK market. The regulatory and commercial conditions in the UK are now more favourable than ever to a company wishing to offer ADSL by wholesaling IP streams over telco-owned lines, and so it makes sense for Vodafone to enter the market in this way rather than to invest straight away in a facilities-owning approach. Although it would provide more flexibility, it would require both significant Capex and a fixed skill set currently not available in-house. It may make sense for an established player like AOL to move into local-loop unbundling, but it's too early for a new player like Vodafone to undertake that level of commitment. Wholesale allows Vodafone to outsource responsibility for the broadband services, and no-one else has better coverage than BT Wholesale. We also think it's likely that BT Wholesale will have shared its NGN and broadband access plans with Vodafone. So while there is a long gestation period, Vodafone can feel confident that it has gone for a future-proof arrangement. It's also interesting to note that by going with BT's wholesale DSL product, Vodafone is creating good potential for reciprocal benefits with its business partner. Vodafone, of course, is already wholesaling minutes on its cellular network to BT, for its BT Mobile MVNO operation. It is this deep relationship which is likely to have influenced Vodafone's decision not to enter via the LLU route. In retrospect the choice of BT seems somewhat inevitable - though it will still come as a heavy blow to Cable & Wireless, who were pinning considerable hopes on Vodafone to provide a boost to its struggling wholesale business. This deal is also likely to fuel further speculation on a BT/ Vodafone merger, something which we commented on back in May 2006.It's good that we know more about Vodafone's plans for broadband in the UK. But those plans are very UK-centric, and we shouldn't necessarily expect them to be an indicator of how it enters the ISP business in other markets, where we think it is likely that Vodafone may pursue an LLU route.
