The aggressive strategy that put Vodafone at the head of a global empire has proved its undoing. Is this pioneer now a dinosaur, doomed to extinction? Chris Nicholson reports
How did Vodafone get so large?
Right from its founding in 1985, Vodafone single-mindedly pursued a strategy of rapid global expansion, often through aggressive takeovers, while focusing only on the wireless mobile-phone market. Its "big is beautiful" strategy brought in more than 170 million customers in more than 25 countries and turned Vodafone into the world's largest wireless company by revenue. Under its empire-building CEO, Sir Christopher Gent, the firm embarked on a series of takeovers, including Germany's Mannesmann for £112bn at the height of the dotcom bubble in February 2000, Japan's third-largest mobile operator, J-Phone, in 2001, and a 45% stake in America's Verizon Wireless in 2000.
Where did it go wrong?
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In May, Vodafone announced an annual loss of £22bn, the largest in European corporate history, including hefty write-offs from the acquisition of Mannesmann. Its bold strategy, based on the premise that it could sell a uniform product around the globe and that its size would give it a scale that would drive costs down and grow profits, has proved its undoing. It failed to take into account that it was dealing with a product with traits unique to each market. This was never more obvious than in Japan, where Vodafone's idea of scale was simply to ship in the 3G technology it uses in Europe. The tech-savvy Japanese were unimpressed and customers left in droves.
How has management handled the situation?
With endless rounds of public blood-letting. For months, newspapers were full of stories on the rows over troublesome acquisitions between the management of new CEO Arun Sarin and the old guard associated with Sir Christopher Gent, who stepped down in 2003. The last senior executive remaining from the former regime, Peter Bamford, its head of marketing, was forced out in March, but declining growth and a series of profit warnings have kept management on the back foot.
Does Vodafone still want to take over the world?
No, not any more. The first half of 2006 witnessed a major shift in Vodafone's global strategy. In March, it sold its loss-making Japanese subsidiary to Softbank, the Japanese internet group, for $15.1bn Vodafone's share price jumped by 10% on the news. Following this failure, the company is looking to markets where it can best exploit its scale, most likely in Europe. Rumours also persist, despite company denials, that it is planning to sell its Verizon Wireless stake, which is estimated to be worth around £25bn. Industry analysts consider the US, like Japan, to be a distinct market with differing technology, where Vodafone can exploit neither its size nor (as the minority partner) the Vodafone brand. A series of imminent mergers in the US telecoms sector is expected to prompt its partner in the joint venture, Verizon Communications, to buy Vodafone out sooner rather than later.
Does it have a strategy for the future?
In May, Vodafone launched a new range of services for customers, called Mobile Plus. Still focused almost entirely on wireless voice services, the plan was widely criticised for not being fast or deep enough, given Vodafone's predicament. The wireless industry is about to be revolutionised by internet-calling technology, just as the fixed-line sector has been in recent years, which will see prices plummet. This is not good news for Vodafone, which currently gets more than 80% of its revenues from wireless voice calls. Its mobile-only focus has left it lagging behind competitors who have embraced the convergence of technologies and now offer inclusive packages of voice calls, broadband, television and wireless services.
In response, Vodafone has said that it hopes to earn 10% of its revenues by 2010 from broadband and data transfers. Nevertheless, this wireless pioneer is in danger of becoming a dinosaur.
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