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Friday, October 13, 2006

Voda/P4U Deal

Now that information about the deal is coming out, it highlights to me just how weak Vodafone is in the consumer segment. Vodafone had 16,185k customers at June 30th and 39.4% of these were contract or 6,377k with annual contract churn at 20.1% - Vodafone needs to recruit 1,282k customers/annum or 107k/month just to stand still. The exclusive consumer deal with P4U required just a minimum of 30k/month - all the volume with Vodafone is in the Business Sector.

The commitments in the P4U deal are nothing special: after all with CPW selling 1.8m connections/year and only 10% being from Vodafone. I would guess that o2 will be selling above that in CPW. Also, the penalties on none delivery of volumes is not that financially different from a tiered commission system based upon volumes. The thing that is different and which hurts CPW most is exclusivity and the threat to the business model.

In terms of cost to CPW, they are rumoured to do 1.8m connections in the UK with Vodafone accounting for 10%. With Contract Gross Margins averaging at £100 this accounts for £18/annum or £5.4m contribution. Although a lot it is not on the small scale as the TalkTalk start-up losses. What will be interesting is whether people go into CPW shops to buy Vodafone products or CPW sell 10% of its’ customers Vodafone. If it is the later, CPW will find it relatively simple to sell some other network product. If it is the former it is far more dangerous for CPW, because the customer will walk over the street to Phones4U. It is a nice analysis to be done with Game theory.

Out of all the operators, Vodafone is probably the operator with the least exposure to the Consumer Segment and therefore with a healthy dose of hindsight was always probably the one who would do something seriously disruptive to the current method of selling.

The big question is whether anyone else with follow suit?

It is mooted in the Times that Orange is reviewing its’ indirect sales channel. I would think this would be an incredibly brave decision given the volumes that I guess that both Orange and O2 are doing through Carphone. I do think however that T-Mobile could be the next to break ranks. T-Mobile UK has a new US CEO, Jim Hyde, puts it very nicely:
'Charles [Dunstone] and John [Caudwell] have done a tremendous job in leveraging their brands… Well done. Well done to them.' 'But,' he adds, 'they've been helped along the way. If anyone is complaining that they're too powerful, I'd say to those people, look in the mirror.' Hyde says he has experience of dealing with retailers bigger than Carphone and Phones 4u 'by many multiples.'
T-Mobile which is rapidly growing its’ contract base adding 629k in the first half on the back of the phenomenal success of the new Flext contract (1m customers in 7 months) and it is noticeable that T-Mobile does not have a big presence in CPW since the reduction of commissions.

With the demise of The Link and Dial-a-Phone, both of whom had their contracts pulled by Vodafone previously, the retail sector is undergoing rapid change. There are other countries where the model is radically different from the UK.

At the end of the day, all the networks operators have been complaining for years about churn, the independents actively encouraging it and high acquisition costs. This situation was intolerable in an environment of rapidly falling margins – it was question of when rather than if the one of the operators would take action to sort the problem out and when the other operators follow suit.