Vodafone and Telefonica have announced plans to create a shared grid in Britain to improve existing coverage and speed the roll out of superfast broadband networks.
British telecom giant Vodafone Group Plc and its Spanish rival Telefonica have agreed to form a 50/50 joint venture in the UK by combining their mobile phone networks in an effort to expand coverage and provide high-speed mobile internet services amid increasing competition.
In a statement, Vodafone said both companies’ UK divisions would jointly operate and manage a single network grid in the UK that will run two competing mobile internet and voice networks. The companies expect that the deal will ensure their capability for the next generation of 4G mobile services, subject to the outcome of UK communications regulator Ofcom’s auction of the wireless spectrum required for 4G services.
Ronan Dunne, CEO of Telefónica UK said, “One physical grid, running independent networks, will mean greater efficiency, fewer site builds, broader coverage and, crucially, investment in innovation and better competition for the customer.”
The deal will help both groups as they grapple with fierce competition, regulatory pressure and the need to upgrade their networks to support growing demand from customers who access the Internet on the go via smartphones and computer tablets.
“This will create two stronger players who will compete with each other and with other operators to bring the benefits of mobile internet services to consumers and businesses across the country,” Vodafone UK Chief Executive Guy Laurence said. “This partnership will improve the service that customers receive today and give Britain the 4G networks that it will need tomorrow.”
The announcement follows similar deals across Europe, where operators are looking to cut basic infrastructure costs while maintaining independent brands. The two groups could extend the agreement to other European markets, but Laurence and Dunne told reporters the deal was designed to meet the specific pressures in Britain, where consumers have led the move into mobile broadband services.
Analysts said the deal made sense as Telefonica in particular is under pressure to cut its debt pile and is currently stepping up plans to dispose assets.
The agreement will be analyzed by the regulator Ofcom, but it should be welcomed by the government, which has called on mobile operators to roll out faster services to boost the economy by making the country more efficient.
Jeremy Green, principal analyst at Ovum provided the following perspective:
“This is an entirely sensible move by Vodafone and Telefonica in the UK. In fact, we did predict this as early as 2008, when we said that most countries would end up with only two physical LTE networks.
“It follows on from the merger of T-Mobile and Orange in the UK into Everything Everywhere. If Vodafone and Telefonica had not also embraced sharing in this way they would have been at a competitive disadvantage. As it was, they were able to build on and extend the relationship that they already had through Cornerstone, their existing joint venture. This sets them up well for the 4G rollout and will help them catch up on 2/3G rollout too.
“Both operators stress that it has no implications for their relationship elsewhere, and that they will continue to compete on services. This move follows the logic of network economics and technological possibility, and is what the near future is going to look like.”
In a briefing with analysts, the CEOs of Vodafone UK and Telefonica UK opted not to disclose any financial expectations from this 50/50 joint venture. Yet, Ovum estimates that a combined savings of over £1 billion across 2G, 3G and 4G is achievable by 2015.
Emeka Obiodu, senior telecoms strategy analyst at Ovum believes both parties can expect to save about 25% of their network costs:
“The beauty of the deal is that both Vodafone and Telefonica can look forward to saving at least 25% of their network costs. Considering that Vodafone UK spent £575 million in capex in the year ended March 31 2012, this could lead to savings of over £100 million a year. Over the three years from now until 2015 when both parties expect to achieve 98% indoor population coverage across 2G and 3G, the combined potential savings would be in excess of £600 million.
“By the time both parties roll out LTE, the potential savings would even be higher. The CEOs told us that the network sharing deal at the 2G and 3G level, especially with the installation of single RANs, is laying a solid foundation for further sharing on LTE. If we then assume that it could cost up to £1 billion for each operator to roll out LTE in the UK, combined potential savings for both Vodafone and Telefonica from this deal would be worth in excess of £1 billion by the time they hope to have a 98% LTE coverage in 2015.”
Elsewhere, Obiodu, expects that, ultimately, at least 50% of all LTE rollouts will use shared networks:
“While there is no certainty yet about how LTE spectrum will be divvied up in the UK, this deal lays the groundwork for both parties to build out a single LTE network in the country. That means that effectively, the UK is set to become a country with only two physical LTE networks from the Vodafone-Telefonica group and the Orange-T-Mobile-3 group.
“Indeed, we are not surprised at this. Since 2009, Ovum has warned that the financial realities facing mobile telcos means they have no choice but to share their networks. We posited that most countries will end up with not more than two networks. Going forward, we also expect that at least 50% of all LTE network rollouts in the world in the next five years will involve some form of active network sharing.”