:VODAFONE: Traders Thread, Long or Short!

Vodaphone has fallen off a minor cliff since the start of November 2005.
This is made worse since it has happened against the backdrop of a market rally
and has continued during the on-going Santa rally .
It is understandable that stockholders and investors on this BB feel very
frustrated by this . They thought that they were investing in a
top-notch company . In some ways VOD is. VOD is worldwide the largest
mobile ‘phone company . It is still functioning or appears to be functioning as
a cash cow . I say “appears” since big companies can afford
clever accountants who can sweep financial problems out
of sight . I am not suggesting that there are immediate financial
problems . The finances of such a company are complex
and not easy to assess . ADVFN gives hardly any info
on financial fundamentals for VOD .
VOD have finally reached the point of roll-out of third generation mobiles which they
hope will bring some return for their huge investment in the
licenses won at auction and a higher revenue stream from the technically more
advanced mobile ‘phone service(with advanced internet & video access capabilities) .
So what is the reason for the renewed market pessimism?
I think the reason is that there are dark clouds on the horizon.
Firstly, the level 3 rollout is expensive since the more advanced mobile ‘phone
gadgets needed have to be heavily subsidised to entice users into new contracts .
Further the new gadgets are soon swapped for even newer and more expensive gadgets by their users
before the full benefit of front-end subsidy is recouped .
Also, the migration to the more advanced service is slow while its launch had to be
promoted by heavy start-up costs. All this had been anticipated by the market and probably
does not explain the recent share price fall. Yet,during the run-up
to Xmas you might well have expected some positive market
response to the buoyant sale of hot favourite mobile-phone
Xmas presents . The lack of such seasonal good cheer
has surprised me and must be worrying for investors .
Next, their(VOD’s)main strategy of gaining world domination
of the mobile ‘phone market has partially failed since they
have not cracked the American market
(despite their large investment in Verizon) and
are only also-rans in a number of major European countries .
The market has been aware of that also for some time
though their expansion into Turkey at high cost highlights
the stalemate in the key western countries .
So what’s new and what’s so bad ?
I think VOD are still reaping last years harvest . A rich harvest it
appears to be . This may have led to some top management
complacency and failure to address the really strategic
issues of the future.
It has been anticipated for some time that fixed
telecomms, internet/broadband , wireless ‘phone service, TV ,
Computer games and entertainment are all coming together
but only now has the market reached the maturity where
such merged services are actually/gradually becoming
available at an affordable price.
It seems clear that service providers which can offer and
combine most or all of these features will probably steal the
greatest market share . Specialists who address a niche
market such as tracking, remote alarms and remote
surveillance and satellite navigation tools also have a
chance of success . The competition between huge
companies aiming to offer multiple services is hotting up .
NTL/Telewest, Sky, Ebay, BT,France Telecom , Microsoft,
AOL/Warner and others are all vying for a slice of the action .
The cable companies, after debt write-off , chapter 11 protection and forthcoming merger are just re-emerging as formidable
challengers in the field of high-speed broadband services
with superior service and application qualities .
Some of the ‘phone gadgets now available for fixed line
home ‘phone use
closely resemble mobile ‘phone gadgets . Also BT has brought
out a hybrid fixed line/mobile ‘phone which allows reduced rate
mobile calls at the home base station
And this will be upgraded next year with wimax capabilities to a
wider radius . When this is rolled out the borders between fixed
and mobile calls will be blurred and the huge price differential
between fixed and mobile calls will shrink .
Revenues from fixed line services will be hit by VOIP which is,
of course an immediate threat to BT more than to VOD .
However, as wifi and wimax get rolled out it opens up the possibility of mobile VOIP , i.e. free mobile voice calls and free mobile internet access for the basic cost of a service access charge . It appears that telephony paid for by time-unit charge will gradually be ‘phased out . The revenue stream will come from service access charges and value-premium service fees . Exactly which company and which exact technology will conquer this complex market is unclear. However all the big companies will need to make up-front strategy decisions and huge investments before they can be sure what will be a winning formula . Meanwhile , small fleet-footed upstarts with minimal outlay like Skype threaten to steal some of their bacon .Consumers will be spoilt for choice and will definitely be winners . Not all investors will be .
Vodaphone is big enough to survive this fight in the telecomm jungle .
It is expected that VOD will use some surplus cash for share
buy-back and dividend increase . That will give some support
for the share price but does not address the growth
slow-down problems .
To stay a world-leading player it will have to adapt and
broaden its appeal beyond the bounds of wireless mobile
voice and text calls or basic internet access to more
chargeable entertainment and business use content .
It appears that VOD has not yet developed a coherent
strategy to address this rapidly emerging new market
which threatens their old-style , over-priced revenue stream .
Short-sales by hedge fund managers may have accelerated
recent share price falls but the down-trend was established
due to weaknesses in strategy. A new CEO may be needed
to make the brave decisions for fundamental re-positioning .

P.S. I hold no financial (long or short) position in VOD .
The views expressed are my own . Following this review I
have no immediate plan to invest in VOD.

PPS : I suspect that realisation has recently hit the market
that the business model of a big and succesful(in the past)
company like Vodaphone can be under threat.
The continueing technological revolution now brings
about the integration of fixed and wireless telephony
coupled with VOIP and internet . This will be panacea
for the consuming public and a nightmare for the mobile operators