Vodafones(LSE: VOD) CEO, Vittorio Colao, has warned that the group is now facing a prisoners dilemma as the companys peers work to offer customers bundled television and broadband services.
Vodafone is worried about the quad-play arms race. Quad-play packages offer consumers a mobile contract, pay-tv package, broadband and landline connectivity in one package, making the all-in-one package cheaper for the consumer and more convenient.
Simply put, the prisoners dilemma puts Vodafone in a precarious position. All of the companys peers are trying to secure exclusive content, which has trigged a telecoms arms race. Vodafone cant afford to stand by and watch it has to compete and offer the same kind of deals. If the group fails to compete effectively, by cutting prices and bundling services to attract customers, then it stands to lose out.
Unfortunately, things are only going to become more complicated for Vodafone now thatBT(LSE: BT.A) is entering the mobile market. Indeed, BT already holds a dominant position within the broadband and pay-tv markets and the companysrumoured acquisition of a mobile network is going to make things really difficult for Vodafone in the UK.
Its been revealed this week that BT has been in talkswith bothTelefonicas02 and with EE, which is owned byOrangeandDeutsche Telekom, regarding the possibility of acquiring eitherBritains number one or two mobile operator. Theres no need to say how problematic a deal like this could be for Vodafone. BT already controls the UKs broadband and fixed-line telecoms infrastructure. If the company purchased the UKs largest mobile network it would have unrivalled economies of scale and pricing power.
Further, as one of the markets smaller players,Talktalk(LSE: TALK) is really threatened by thisnew development.
Talktalk had been a first mover in the quad-play market. This month the group announced that it had inked a deal withTelefnica, allowing the company to offer customers a mobile SIM as standard with TV packages for no additional cost.
According to TalkTalks last update,10% of the companys customers had already accepted quad-play packages, with many moving on to the companys mobile service. Whats more, the group has a total of four million additional broadband customers to which it can offer its quad-play bundles.
However, now BT and Vodafone are both being forced to enter this market, theres a chance that Talktalk could be squeezed out as the two telecoms giants fight for market share.
The bottom line
As the quad-play bundle takes off, Vodafone is facing a dilemma. The group has to decide whether or not it will get involved in a quad-play price war for customers, which could dent profits.
Unfortunately, the companys hand may be forced if it wants to maintain customer loyalty.
Nevertheless, Vodafone is one of global telecommunications sectors largest players and the companys size and global diversification will give it an edge over its peers.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Vodafone. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.