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Vodafone Tears Down Its Walled Garden

When Apple (AAPL) in 2007 offered Vodafone (VOD) a two-year deal to become the exclusive British operator of the iPhone, the European telecom giant took a pass, ceding the opportunity to Madrid-based Telefónica (TEF). The iPhone, explained then-Chief Executive Officer Arun Sarin at a board meeting, would be so costly that it would never take off, according to a person present at the meeting. Without much discussion, the board moved on to the next item.

Talk about a dropped call. Telefónica’s sales in the U.K. soon surged, and Vodafone’s languished, as the iPhone quickly became one of the most popular gadgets of all time. Vittorio Colao, a former McKinsey consultant who became Vodafone CEO a year after the iPhone misstep, has spent much of his tenure trying to undo the damage from that decision and unwind a “walled garden” strategy that restricted some services and made it more difficult for customers to purchase apps and content from anyone but Vodafone. In recent months, Colao has been busy nudging the company, with market capitalization of $132 billion, deeper into the lucrative global mobile data market, even if that means striking alliances with rivals. This summer, Vodafone opened a research center in Silicon Valley to be closer to app developers, and it invested in a U.S. company that helps give doctors access to patient data via mobile devices.

Vodafone in August inked a deal with Google (GOOG) to become the first European carrier to allow subscribers to download Android apps quickly without having to fill out credit-card information with each transaction; now such charges go directly to their phone bills. Vodafone has rolled out the service in the U.K. and Germany and will extend it to Italy and Spain this month. That’s helped propel its European smartphone data use 30 percent in the last six months.

Vodafone is counting on the Google deal to speed data usage to offset falling cellular voice service revenue in Europe. In Britain, it’s also joining with Telefónica’s O2 mobile network and a venture with France Telecom (FTE) and Deutsche Telekom (DTEGF) to form a mobile payment and advertising system to lure marketers to smartphones—in potential competition with Google. “Once upon a time I was the only actor on the stage and everyone clapped, but now there are other players,” says Colao. “We have to accept that but still want to get some of the clapping.”

The potential of Android products was no surprise to Colao. Verizon Wireless, Vodafone’s 45 percent-owned U.S. joint-venture with Verizon Communications (VZ), was having huge success with smartphones that use the Google-developed operating system. Verizon, also initially without the iPhone, was instrumental in nurturing Android with heavy promotion of the Droid phones from Motorola Mobility (MMI) and HTC (HTCKF). Verizon’s investment in faster wireless networks and devices paid off, propelling the company to faster growth than rival AT&T (T). “Every time I come back from the U.S., I’m jealous of this profitability,” Colao says.

Hoping to repeat that success, Vodafone is boosting investment in faster networks to propel smartphone sales and sustain growing data traffic. Capital spending rose 8 percent to £2.6 billion in the first half. Colao also has tweaked pricing, adopting tiered charges for the amount of Internet and video data used rather than unlimited plans.

The strategy is starting to pay off.Vodafone’s annual sales from mobile data have more than doubled since Colao took over and now exceed $8 billion annually. In Germany, Vodafone’s biggest market, its data revenue jumped 23 percent in the year through March, and it now has 15 percent higher data sales than Deutsche Telekom. Explains Colao: “Now there is more choice of smartphones, and the gap [with Apple] is narrowing.”

The bottom line: Vodafone, a laggard in data sales since passing on the iPhone, has seen a 30 percent jump in the past six months.

Browning is a reporter for Bloomberg News in London.

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