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Tuesday, November 14, 2006

Vodafone results - reading between the lines.....

I'm trying to dissect some of Vodafone's huge swathe of pronouncements today. Not only its interim financial results, but also an advertising deal with Yahoo! There's a webcast later, but some initial thoughts:

- notable omission in Arun Sarin's statement of much about mobile-centric content or data services, except for a vague line "applications using the benefits of mobile broadband following the introduction of HSDPA" and a reference to the Yahoo! deal. Instead, the focus is firmly on cost-saving, fixed-mobile substitution, and voice minutes
- Vodafone appears to be heading back to a position of POMS (Plain Old Mobile Services) supremo, with its rapidly growing emerging markets business.
- there a certain disdain of its own recently-announced fixed broadband products "We will continue to pursue a mobile centric approach, focusing on the core benefits to customers of mobility and personalisation, and will resell fixed line technologies only according to customer needs" . Question - would you really want to buy any service that is offered so grudgingly?

Now, lets look at data services. This line is very telling, and highlights some comments I made back in May at its last results "Data revenue increased by 27.2%, or 29.1% on an organic basis, with the primary driver being an additional 7.1 million 3G devices registered on the Group’s networks since 30 September 2005, bringing the total to 10.4 million devices, and in particular, the increase in devices in the business segment"

Lets dissect this further. For the six months to Sep 30, revenue from non-messaging data services (ie excluding SMS, MMS) was £650m, broken down to £190m in Germany, £134m in UK, £122m in Spain, £89m in Italy and £91m in "other Europe", less £23m of "eliminations", which I presume is on-net roaming fees, plus another £56m in emerging markets (less another £9m eliminations)

Now, let's look at these "devices in the business segment". There were 1.0m 3G Vodafone Connect Cards in use at the end of Sep, versus 0.66m in March and 0.81m in June. Let's say an average of 850k over the period. Unfortunately, the company doesn't appear to have given the number of Blackberry users this time around - presumably as it also now has alternative email platforms. However, it had 426k of these in March, so a reasonable estimate is for this to have increased to an average of perhaps 550k email users over the 6-month period.

Now, there's a lot of different tariffs on the data cards, so it's difficult to estimate an average. There are some low-end options, but also hefty slugs of roaming at the top end. Last time around I suggested £40 / month, but let's be more conservative and say £35 now. £35 x 6 months x 850k = c£180m . Now, although Voda is now pushing its email solutions down to SMEs and consumers, for the period under consideration it seems reasonable to assume the majority of users are still corporate-grade at perhaps an average of £25 per user per month. So, £25 x 6 x 550k = £83m. So, 3G cards + business email = £260m. Now, add in a bit of inbound data roaming, plus some 2G data per-MB services, and we get to perhaps £300m of the overall data services revenue being "pipes". Out of £650m , that's a very big slug indeed.

I wonder if this is why a search of the 48-page results document only yields one mention of the word "content", in the Forward-Looking Statements fine print ("the Group’s ability to develop competitive data content and services that will attract new customers and increase average usage"), and the only reference to music or TV is in the context of a new flat-rate data plan in Germany "Germany has had particular success from bundling data services with a new contract tariff which enourages data usage by offering free mobile TV, surfing the Vodafone live! portal and music downloads for a flat fee each month".


I just noticed something extra on data services. In June 2006, the company reclassified "messaging content revenues" - I guess mostly premium SMS used for ringtone downloads and similar -from "messaging" to "data". The financial small print says "The impact for the quarter ended 30 June 2006 is to increase the total Group data revenue as a percentage of service revenue by 1.0% to 4.9% and to reduce the total Group messaging revenue as a percentage of service revenue by 1.0% to 12.5%". Assuming the 1% is the same in Q2, this means that another £145m of the data total is premium SMS/MMS.

So, in short, my estimates:

Total non-messaging data = £650m
of which:
- Data cards = £180m
- Premium SMS/MMS content = £145m
- Email (mostly Blackberry) = £80m
- All other (music, TV, inbound data roaming, business services like telematics etc) = £245m

In other words, I estimate that all the Live! and consumer 3G services generate around £40m / month. Now clearly the 30m Live devices (of which 10m are 3G) will be among the major users of the premium SMS services, but the whole Live! infrastructure is clearly about more than just ringtones. I'd estimate that a Live! device probably needs extra subsidy (£10? £20? more?) to cover the cost of extra software, hardware & design/test. Add to that the costs of Live's delivery platforms, hyper-scale marketing and content acquisition, and it's financials can't be looking too pretty.

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