The problem with a competitive market is that its competitive. I know that sounds like stating the bleeding obvious, but its true. If youre running a business and youre not competing, youre falling behind. Some businesses fall so far behind they eventually wind up.
In addition, the market youre competing in may take a turn down a path that you were trying to avoid, or perhaps a path you thought wouldnt be fruitful. Thats precisely the position that Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) has found itself. That is, BT Group has led the charge down the bundled services path (fixed line, mobile, broadband, and TV services), and now Vodafones got some tough or uncomfortable decisions to make. So how is it all going to play out? Lets find out.
You could do a lot worse than Vodafone
If you look at Vodafone as an isolated company it looks like a sound investment. Vodafone has produced income of 59.25 billion over the past 12 months. Its also managed a net profit margin of around 26%. Given how flat the telcos revenues are, the CFO deserves a pat on the back for that achievement. The management accountants also deserve a round of beers given the companys return on assets sitting at just under 9%. Given the stability of the stock price, longer-term investors might also be attracted to Vodafones dividend. Its a little over 11p, pulling in a yield of around 4.8%.
Heres the thing, though: while to date the companys performance has been sound, shares in the telecommunications firm are down 2.5% over the year. That suggests a lack of confidence in the value of the firms future cash flows (or its value). Why is that? It may have something to do with the direction the company is taking, or at least thinking of taking.
Its current offer
Its all about 4G at the moment. Vodafone has been using content offers to encourage customers to take its premium 4G offering the idea being that customers use additional data as part of their contracts. Its main competitor, BT, on the other hand, has bundled TV with broadband and mobile services. Its TV offering provides on-demand content, 20 extra entertainment channels, 9 extra childrens channels, 11 Movie channels, and 3 live sports channels. Vodafone simply doesnt compare. So does Vodafone step up, or does it cut costs (and drop prices) in order to compete with the many other high-tech mobile providers out there?
Vodafones game plan
The mobile provider looks like its going to step up. Vodafone says its planning to launch its own broadband and TV services in spring next year. The telco already offers Sky Sports channels on mobile devices as part of its 4G bundles. It also recently introduced the Sky-owned Now TV as an option for 4G customers, granting access to Sky Movies. So now, rather than leapfrogging BT which is a mammoth task the most sensible option looks to be a full-scale partnership with Sky, allowing both companies to offer a complete range of broadband, fixed line, mobile and pay-TV services. The end result would effectively be BT versus Sky and Vodafone.
Naturally BT has responded by saying itll likely re-enter the mobile market around the same time that Vodafone is expected to move into broadband. The competitions therefore now become neck and neck.
The risks
This all makes sense to me accept for the fact that Vodafone is essentially going kicking and screaming into this new digital revolution. Vodafones chief executive actually said he had doubts that in the long run this content will really create a lot of value for the platform. He said he thought it would just create lots of value for the owner/customer. No offense taken, Mr Colao! Realistically Vodafone needs to embark on this project to stay in the mobile and TV space. It cant do it on its own, nor does it want to do it on its own so itll likely partner up with Sky. Partnerships are meant to create synergies, but I cant see this new partnership generating much love. Its essentially an arranged marriage. If Vodafone can learn to love broadband and TV, however, youve got yourself quite a partnership.
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David Taylor has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
