It was the biggest splash of red ink in European corporate history. On May 30, Vodafone (VOD), the world's largest mobile operator by revenue, posted a $41 billion net loss for 2005.
The Newbury (England) wireless giant is in no danger of going bust: The one-time hit to earnings, while huge on paper, stemmed from a writedown of assets, mainly in Germany, and belied otherwise decent operating results. But these are undoubtedly difficult days for the former high-flier (see BusinessWeek.com, 6/6/06, "How to Fix Vodafone").
True, revenues for 2005 rose 7.5%, to $55 billion, and operating profits, excluding the one-time charge, rose 11%, to nearly $18 billion. Hoping to put boardroom squabbles, profit warnings, and a falling share price behind him, Chief Executive Arun Sarin says Vodafone is "outperforming its competitors in an increasingly challenging marketplace."
But beyond the soothing words, there's a sense that Vodafone is in crisis. Growth in its European core market is slowing, and margins are declining. Over the past six months, Vodafone issued three profit warnings and endured a bitter boardroom battle that resulted in the departure of five directors and the decision by former CEO Christopher Gent to resign his honorary position as "President for Life." Its share price has fallen more than 13% during the past year, vs. a 1% decline for the Standard & Poor's 350 European Telecom Services index.
FALLEN ANGEL. Intense competition led Vodafone to bail out of Sweden and Japan. And now investors are demanding that the company sell its 45% stake in Verizon Wireless in the U.S. to New York-based Verizon Communications (VZ), which owns the remaining 55%. Sarin says he is content to keep it.
Many analysts believe it is only a matter of time before Vodafone sells. "The reality today is that Vodafone's entire global strategy is falling apart," says John Strand, CEO of Strand Consult, a wireless consulting firm in Copenhagen.
What's wrong? In its late-1990s heyday, Vodafone's ambitious quest for global domination and its unique position as a mobile pure play made it the darling of the wireless world. Size and focus were advantages in the race to roll out GSM networks across the planet and develop third-generation (3G) mobile services. But integrating Vodafone's disparate patchwork of operations across 27 countries proved tougher than anticipated. After spending billions building 3G networks, revenues from data services have failed to take off (see BW Online, 02/28/06, "Vodafone's Tough Calls").
At the same time, the price of good old-fashioned voice calls, from which Vodafone still gets 80% of its revenues, is plummeting, due to intense competition from mobile virtual network operators such as Virgin and Internet telephony players such as Skype (EBAY). Vodafone's wireless-only approach today seems shortsighted when rivals such as France Télécom's Orange (FTE) are offering a so-called quadruple play of mobile and fixed-line calls, broadband Internet access, and digital television, bundled in one bill.
CUTTING COSTS. How should Vodafone respond? To compete in the new "converged" world, the company is already breaking with its empire-building past and moving into fixed-line services. It has created a new division that will be responsible for developing revenues from the blending of mobile, Internet, and broadband technologies. Sarin dampened speculation that the company will buy a fixed-line telecom operator. Instead, he says Vodafone will be "technology agnostic," buying capacity from operators and selling it as part of a bundle of services.
The new strategy also aims to cut costs and boost revenues in Europe, where Vodafone derives 80% of its revenues and 90% of cash flow. Sarin plans to cut 400 jobs from headquarters in Britain and outsource more information technology, a move he reckons will save up to $377 million in operating costs by 2007. Vodafone also plans to focus on boosting revenues in faster-growing emerging markets such as Turkey, where the company recently acquired mobile company Telsim (see BW Online, 12/19/05, "Vodafone's New Growth Map").
And lastly, in a bid to appease disgruntled investors, Vodafone increased its dividend by 49% and announced plans to return $17 billion in cash to shareholders in the form of a special payout.
Investors welcomed the strategy with a 3% gain in Vodafone’s share price. But industry experts are divided on whether the changes are enough and what else Sarin needs to do. To find out what four of the leading thinkers prescribe to fix Vodafone's ills, read on (see BusinessWeek.com, 6/6/06, "How to Fix Vodafone").
Capell is a senior writer in BusinessWeek's London bureau
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