Assessing the benefits of European mobile alliances

This report examines the two major alliances of mobile operators active in Europe to see if being in an alliance has produced any apparent benefits in their results. We compare them with relevant Vodafone operators as a benchmark.

Alliance objectives

In late 2003 FreeMove and Starmap were formed from groupings of European operators. They were launched with two broad goals.

Explicitly, they aim to knit together member networks to offer seamless services to multi-national corporations (MNCs) and international travellers. These seamless services include competitive, simple tariffs, and value-added services. They are also intended to lock in the MNCs through improved account management.

Revenues and customer loyalty should go up - the alliance should drive traffic, protect roaming revenues and enhance the ability to serve the needs of what is perceived to be the most valuable customer group.

Costs should come down - the scale of the alliance gives it collective purchasing power and the ability to drive harder bargains with handset vendors.

Implicitly, they aim to offer a defence mechanism against Vodafone. The alliances give the member companies the scale to offer a sensible alternative to Vodafone's footprint and pricing.

Alliance members

FreeMove is an alliance between Orange, Telefonica, TIM and T-Mobile. FreeMove's current focus is on its members' European operations, although it has a stated aim to roll out globally. The Americas is the most obvious region to expand into given the presence of T-Mobile USA and TIM's and Telefonica's properties in South America.

Starmap is a wider alliance in terms of companies, although its immediate coverage is more limited than FreeMove. Its current members are ONE (Austria), Sonofon (Denmark), mmO2 (Germany, Ireland and the UK), Wind (Italy), Telenor (Norway), Amena (Spain), Sunrise (Switzerland), Eurotel (Czech Republic) and Pannon (Hungary). Although coverage is currently Euro-centric, there are reports that it wants to expand into Asia-Pacific and the US.

Alliance competition

We are comparing FreeMove and Starmap with a group of operators that:

• are Vodafone controlled
• have a Vodafone ownership stake
• are Vodafone partner networks.

Non-controlled operators and partners are compared only if:

• they are using Vodafone branding or offering Vodafone services; for example, the 3G data card
• FreeMove or Starmap are also present in the country, or that country is a core part of the European framework, either geographically or politically.

We'll never be able to tell how successful they actually are

Isolating whether membership of an alliance is making a difference would be very powerful. Our analysis was built to do that, but:

• the alliances have not been running long enough to isolate any distinct trends. Even though both Starmap and FreeMove were announced in late 2003, neither really started marketing itself in earnest until at least mid-to-late 2004
• there are many other factors at work in their domestic operations that are having a bigger effect on the results than the alliances' services.

Furthermore, Vodafone has only just made efforts to quantify the benefits of its 'One' programme externally, and it is clear that it will be difficult to get to grips with how transparent this reporting will actually be.

From Ovum's commentary on the announcement of the One Vodafone reporting programme, 'Vodafone to show us that big is beautiful', 28 September 2004:

At Vodafone's analyst and investor day yesterday, the company quantified the anticipated benefits it expects from the One Vodafone initiative. Specifically, it expects to realise £2.5 billion of 'annual pre-tax operating free cashflow improvements by 2008', of which £1.4 billion will come from cost initiatives and £1.1 billion will come from revenue initiatives.

Vodafone gathered everyone together to reassure them that the company was firmly on track, guidance would be met, 3G will be launched in Q4 and all was progressing very well this year and out into the future. Showcasing Arun Sarin, it was down to him to drive home just how united the Vodafone company is, and that it really is starting to achieve the benefits of its global scale, as highlighted in the One Vodafone programme.

I have no reason to doubt the integrity of this programme, but it is based on quantifying costs that would have been incurred and revenues that would not have been realised had the programme not been put in place. So quite how the company itself will present this remains to be seen, and any sanity check by the rest of us is going to be pretty much impossible.

But we do believe there are positives

FreeMove

Freemove is the power player - it has scale and plenty of it. All four members are significant players in their own right, and together they have a formidable global presence.

FreeMove's opportunity lies in its strength in the core markets of France, Germany, Italy, Spain and the UK, and its global potential throughout the Americas. It knows the MNCs in its own markets well and has existing relationships with most of them. By exploiting this scale and revenue potential to the maximum, it can exert pressure on Vodafone in the battle for global positioning. In addition, its users account for about 50 million handset sales in Europe alone, which gives it a very strong position when buying from handset vendors.

However, the key issue is whether scale will be enough. FreeMove alliance members will find it very hard to integrate their systems to achieve real economies of scope. They simply will not be able to match Vodafone's ability to align infrastructure spending and deployment.

Starmap

Starmap is the interesting player. It has a broad membership but no obvious synergies for serving MNCs. It also appears sub-scale and will struggle to compete with either FreeMove or Vodafone on scale benefits, even if it enlarges its membership.

However, do not dismiss Starmap as weak. It can still be greater than the sum of its parts. It may be an alliance of the smaller operators, but it is showing the best recent growth record in terms of both connections and revenues. Out of this comes an opportunity to drive handset cost reductions, and therefore competitive advantage in its home markets, by offering vendors volume placement of targeted devices. This in turn can drive acquisition of high-quality customers, improved customer loyalty and higher revenues.

Vodafone

Vodafone is the player they are all trying to beat, and it's easy to see why. During the boom years it went for scale and customer quality, and it has achieved these over an enviable footprint. Now that markets are maturing it needs to focus on scope efficiencies, and it has the ability to get significant economies here. Vodafone can drive deeper cost efficiencies into its organisation by sourcing and rolling out a common infrastructure. It is currently doing this with Vodafone Live! and its new billing platform.

We do not believe alliances will be successful with MNCs We question the ability of alliances to serve and win enough MNC business to be truly successful.

Many alliances have previously been created to do the same job. What usually happens is that the alliance gets off to a good start and wins enough blue chip customers to give it the aura of success - but these wins are through existing relationships or obvious natural fit. Because the MNCs are very sophisticated buyers, the cost of keeping these accounts and trying to win new business away from the competition becomes a matter of heavy discounting. Consequently the model becomes unsustainable.

Too many alliances have foundered trying to be a global supplier to MNCs for us to change our cynical view. We remember very well Concert, Unisource and others. All were established to offer MNCs a common global footprint, simple affordable tariffs, one-stop shop account management and so on. Where are they now?

FreeMove and Vodafone dominate in terms of size

Alliances are first and foremost about footprints and volume.

• FreeMove and Vodafone are clearly in a league of their own. FreeMove's 166 million connections in 17 countries and Vodafone's 133 million in 25 account for nearly 20% of the world's mobile users, and 60% of combined Western and Eastern Europe. If the rest of their global operations and partners are taken into account, their sheer size is even more impressive.
• Vodafone may be smaller in terms of customer numbers, but is much closer in terms of market share and revenues. Vodafone has higher value customers.
• Starmap is the smallest group by some margin. It simply does not compare to the scale achieved by either FreeMove or Vodafone.

For growth, look to Starmap

FreeMove and Vodafone have the volume advantage, but Starmap is ahead on growth rates:

• Starmap adds fewer subscribers because of its scale, but its year-on-year percentage growth has been consistently higher and its revenue growth is even more impressive. If this growth is because of a change in higher value, quality customers, the value proposition of the alliance will be enhanced through its ability to market itself to handset vendors, particularly in terms of targeted devices that help to foster increased usage and revenues.

Subscriber quality: it's in the mix

Revenue generation from the corporate market is at the heart of the alliances' raison d'être. None of the operators reveal data on their performance in the corporate market, but contract users are a reasonable proxy for subscriber quality, both corporate and consumer.

• The Vodafone operators have the best contract mix in their user bases and are generally accepted as leaders in the corporate market. FreeMove falls down a little here, which explains why Vodafone's revenues are so similar to FreeMove's.

• Starmap is behind once again, and this is a value metric (not volume) so it is a matter for concern. However, Starmap is outperforming its rivals in terms of change and growth, and the mix in its subscriber base is changing more quickly than for FreeMove or Vodafone.

Subscriber quality: it's also in how much they spend

If an alliance could show that being part of a broader group brought a positive effect on ARPU, this would justify being in the alliance. However, these are all large players and a change in one segment would need to be huge before it would affect overall ARPU. Other dynamics, such as price competition and changes in termination rates, will have a larger effect.

• ARPU is a much better measure of the overall quality of the user base.
• The aggregate figures are relatively close, but the Vodafone operators have consistently maintained the best ARPU. This is a reflection of the quality of the customer mix and though there is no sign of any real growth at the aggregate level, they remain ahead of the market.
• FreeMove has the worst ARPU, marginally behind Starmap, but this should not be taken out of context.
• FreeMove has a much better mark-up between the ARPU of its contract users and its overall ARPU than Starmap. Since we are mainly interested in the quality of the contract user base, this is a strong mitigating factor.

Marginal improvement: but you can't see it yet

At the simplest level, if the alliance works, the margins must benefit. All three groups will therefore be looking to show evidence of margin improvement, or at least show that being in an alliance can lift some of the pressure on margins. Otherwise, claims of revenue enhancement and cost efficiencies through scale economies will appear weak. However, there is nothing in these figures that demonstrates this yet:

• Vodafone and FreeMove have very similar EBITDA margins, which have behaved in very similar ways. Vodafone's margins actually got slightly worse in Q3 2004
• Starmap suffers again, mainly because of its size. The relationship between EBIDTA margin and market share is well rehearsed, and it is no different on this scale than at the national market level. Although Starmap was making up ground to 2004, the last few quarters have seen this trend go backwards as its margins have also got slightly worse.

Network expenditure: invest or die

Neither FreeMove nor Starmap is openly saying that improving spend on infrastructure is a key area for the alliance. However, this is an important area where Vodafone will build an advantage because it can get economies of scope by rationalising its infrastructure spending (at least in its core markets).

• Expenditure on network maintenance and enhancements remains crucial to the alliances. Service quality and network availability are key issues for corporate clients, and will play a strong role in deciding how compelling the alliances' offers are to the corporate segment.
• The estimated network investment of the Vodafone and FreeMove operators has diverged over the past two years as key FreeMove operators Orange and T-Mobile have reined in their capex significantly. We expect this to grow again as the operators pick up investment in both second and third-generation networks.
• Starmap spends proportionally more than both Vodafone and FreeMove in terms of both connections and revenues. This is again a matter of scale, not a sign of competitive advantage through 'better' networks.