Vodafone and 3 create powerful number-three player in Australia - New VHA joint-venture poised to take on Telstra in advanced network market

Last month, Vodafone and Hutchison (3) completed their merger of their Australian units into a 50:50 joint venture to be called Vodafone Hutchison Australia (VHA). Prior to the merger Vodafone and 3 were the third- and fourth-largest mobile operators in the country, respectively, behind dominant players Telstra, the market leader, and SingTel’s Optus. As our forecasted data for 2Q09 shows, the merged entity still trails the two larger operators in terms of connections but has become a formidable third-placed player with 6.3 million connections, representing a 26.3 percent market share, and combined total revenues of approximately AUS4 billion (US$2.7 billion). In the quarter prior to the merger (1Q09), Vodafone had a 16.7 percent share and 3 had 9.3 percent. Under the terms of the deal, Vodafone Australia becomes a wholly owned subsidiary of Hutchison 3G Australia. Both operators’ brands will be used during a transitional period, though the merged company will eventually trade using the Vodafone brand.

The merger was subject to a three month investigation by the Australian Competition and Consumer Commission (ACCC), though the watchdog gave the green light to the deal in May. The ACCC concluded that the smaller operators required sufficient scale to justify investment in their network and argued that consolidation in the market would not affect price competition. This marked a shift from the regulator’s initial view on the deal when it remarked that the removal of Hutchison as “a vigorous and effective competitor” would lead to increased mobile prices in the metropolitan and prepaid market segments where Vodafone and Hutchison are “each other’s closest competitors.”

The issue of network investment is a critical one in a market that is migrating rapidly towards high-speed networks. According to our data, Australia has the fifth-largest HSPA connections base in the world and GSM connections are now declining quarter-on-quarter as subscribers migrate to the faster networks.

This trend is being driven by market-leader Telstra, which our data suggests now has more than 50 percent of its customers migrated to its pioneering‘Next G’network, which was one of the world’s first HSPA-enabled networks to launch in October 2006. The operator now claims to have achieved 99 percent population coverage for Next G and the network was deemed sufficiently developed that Telstra was allowed to switch off its older CDMA-based networks last year, saving it the expense of running two networks simultaneously. It has since upgraded to ‘Enhanced HSPA’ (also known as ‘HSPA Evolved’ or ‘HSPA+’) and is planning to offer unprecedented speeds of up to 42Mb/s by year-end. Optus is planning to offer similar speeds by the middle of next year.

According to our Q209 forecasts, Telstra’s strategy has seen it build a dominant 48.5 percent share of Australia’s high- speed network connections (compared to a 40.74 percent share overall), and an even greater share of HSPA connections. However, the newly-merged VHA is also now a strong player in this category, with 3.5 million connections and a 29.2 percent market share, pushing Optus into third place.

Vodafone and Hutchison made specific reference to their challenge to Telstra in their announcement of the merger, noting that VHA’s high-speed network coverage will be expanded to 95 percent of the country following completion of the merger. However, some existing WCDMA network-sharing agreements affected by the merger - most notably the arrangement between Vodafone and Optus - have yet to be resolved.

VHA has revealed little about its devices and pricing strategy moving forward aside from a commitment to honour existing Vodafone and 3 contracts at the previously advertised rate. Interestingly, the operator will offer the new iPhone 3GS under both brands on different price plans, a consequence of 3 securing the rights to offer the iPhone immediately prior to the merger. The Australian market is unique in that all operators are now offering Apple’s iconic device, including MVNO Virgin Mobile.

Matt Ablott, Analyst, GSMA Intelligence:

The VHA venture is a sound piece of business for both operators and has the potential to become a formidable number-three market player, a factor that clearly appealed to the Australian regulators concerned about Telstra’s dominance in particular. However, in their former incarnations, both Vodafone and 3 were only significant players in the low-end prepaid market, which means VHA has little immediate presence in high-margin segments such as the enterprise. Unlike both its larger rivals, VHA has no fixed-line infrastructure, which may also be a disadvantage in some areas. On the plus side, the network synergies in the alliance will help the operator drive its next- generation network strategy forward and consequently broaden its appeal to higher-value customers. However, as in most competitive and highly-saturated markets, price differentiation is likely to be the key to building market share.