Will 3G Answer Vodafone's Call?

The British mobile-phone giant is counting on its expanded services to give it an edge over the many rivals charging into the field

By Beth Carney

Peter Bamford, Vodafone's (VOD ) chief marketing officer, sees the November, 2004, launch of its long-awaited third-generation (3G) mobile service as the start of a new era. 3G -- which allows users to download pop songs, movie clips, and video games onto their cell phones -- will turn the communication tool into a multimedia source of news and entertainment. "This device is going to become the center of people's lives," Bamford says.

Cellular-service providers dearly hope he's right. Most of them have placed big wagers on the much-vaunted 3G service and need it to be a hit. The bidding war over spectrum licensing in Europe during the dot-com boom cost the industry more than $130 billion, with British wireless giant Vodafone alone laying out $37 billion.


  The outfit badly needs a financial boost. On Nov. 16, Vodafone -- Europe's top mobile-phone operator, with 30% of the market -- posted a net loss of $5.9 billion on worldwide sales of $31.2 billion for the six months preceding September, largely because of goodwill amortization relating to some earlier acquisitions, including 3G licenses. More worrying: Profits before goodwill amortization were down 1%, indicating that growth may be sputtering. The business appeased shareholders by doubling the half-year dividend, to $3.55, and boosting a share-buyback program by $1.9 billion.

With Vodafone's high-profile expansion of 3G consumer services in Europe, it hopes to leap ahead of the competition. It already had limited 3G offerings available in Japan since 2002 and in eight European countries since last spring. But Britain, Ireland, Austria, and Switzerland will get the Vodafone service for the first time, and all 13 countries in which the outfit operates will have upgraded offerings.

The wireless concern's rivals, however, are moving fast. Hong Kong-based Hutchison Whampoa's (HUWHY ) 3G operator 3 (the company's name) began signing up users in Britain and Italy in March, 2003. Since then, 3 has provided service in Austria, Sweden, and Denmark. Also jumping into the 3G fray are Milan-based Telecom Italia Mobile; MM02, a former unit of British Telecom; France Telecom's Orange; and Deutsche Telekom's (DT ) T-Mobile division.


  For Vodafone, nonvoice mobile service, including picture messaging, video downloads, and other multimedia bells and whistles, accounts so far for just 14% of its sales, or $4.5 billion. But revenues have been growing at a healthy 9% clip.

The outfit hopes its new services will further spark growth. 3G subscribers can download clips from popular MTV shows such as Cribs as well as movies of the month, starting with the just-released Bridget Jones: The Edge of Reason. Coming soon will be a series of one-minute videos inspired by Twentieth Century Fox Television's drama series 24.

Also on the way are a range of 10 new handsets, made for Vodafone by Sharp (SHCAY ), Motorola (MOT ), Sony (SNE ), Ericsson, NEC (NIPNY ), Nokia (NOK ), and Samsung. They're designed to handle 3G's increased demands, with better picture and audio quality and longer battery life. And Vodafone has signed deals with big entertainment concerns, including Sony BMG Music Entertainment, UEFA Champions League, and Disney (DIS ) for music downloads, soccer highlights, and film clips for its customers.


  Vodafone has one big advantage over rivals: It already has a successful multimedia business that allows its 11.5 million subscribers to send picture messages and download games and some videos on their phones, although at slower speeds than 3G.

The wireless giant aims to sign up 10 million 3G users worldwide in the next 15 months, with about half that number coming from upgrades among its 146.7 million global customers. That should boost profits as 3G clients are expected to spend more on the pricier new multimedia services.

But avoiding the problems that have plagued other 3G offerings may be tough. Hutchison's 3 suffered a black eye with its British launch last year because calls were often cut off when users moved out of the coverage area. Vodafone officials stress that its customers won't have the same problem.


  Ultimately, consumers will be the big beneficiaries. That's because analysts expect prices to fall as operators create incentives to lure new users to the pricier 3G products. Already, 3 has wooed 1.2 million customers in Britain with cheap phones, cut-price service plans, and fancy new handsets.

Vodafone, too, is subsidizing its new phones to boost subscriptions. It has "raised the profile and also raised the [3G] stakes," says Nick Jones, an analyst at the research firm Gartner. The question now: Can it prosper from this strategy?

Carney is a reporter for BusinessWeek Online in London

Edited by Thane Peterson

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