Tuesday, September 3, 2013

Verizon Purchase of Vodafone Verizon Wireless Assets Might Highlight Strategic Value of Fixed Networks

Assuming the proposed Vodafone sale of its 45 percent stake in Verizon Wireless is completed and approved by regulators, observers wonder what Vodafone will do with the proceeds.

Many assume much of the proceeds will be given directly to shareholders. Some think as much as $90 billion or so will be distributed in that way, leaving perhaps a war chest of $40 billion for acquisitions and infrastructure investment. 

Some have suggested Vodafone will try to buy fixed network assets in Europe so that it can offer bundles of broadband, mobile and TV services.

That, some might argue, suggests something about the strategic value of fixed network assets, namely its value in supporting quadruple-play services. Others might point to the growing value of mobile offload capabiltiies as well. 

On the other hand, many also would say there are clear differences of opinion about the value of fixed network assets. Verizon, one might say, is making a statement about growth opportunities in the U.S. mobile market. 

Others might disagree. Much depends on one's assessment of where growth can be found in the global telecom business. 

One way of looking at the matter is that Verizon sees revenue growth in the European and U.S. mobile businesses, and likes what it sees. Others are worried that Verizon is banking too much on continued strong rates of revenue growth in the U.S. market.

On one hand, it is hard to argue with the facts, at the moment. In Europe, wireless revenue declined 4.3 percent in 2012, while U.S. revenue growth accelerated about nine percent, according to CTIA.

So it makes sense, in that view, to capture more of the value of the growth by getting full ownership of the Verizon Wireless asset.

AT&T, on the other hand, is said to be looking at global assets, indicating a less sanguine view of the U.S. market, in terms of revenue growth. Of course, AT&T has a bigger footprint in the U.S. market than does Verizon, so AT&T might reasonably conclude it has less room to grow domestically.

There are other differences as well. Vodafone has indicated it wants to buy fixed network assets in Europe, to complement its mobile assets. Basically, Vodafone wants to replicate the Verizon Communications and AT&T strategy in the United States, where those firms are able to sell quadruple play offers.

AT&T, on the other hand, is said to be exclusively interested in acquiring mobile assets in Europe, where the belief is, new Long Term Evolution networks will reignite revenue growth.

So where Vodafone is thinking quad play, AT&T is thinking “mobile only.”

Those strategy differences have become increasingly obvious in a business that once featured virtually homogenous strategies by all leading providers in the monopoly era. Since the advent of deregulation, the disruptive influence of the Internet and the rise of mobile services and video entertainment, companies increasingly have chosen distinct business models.

Vodafone originally had a “mobile only” approach but gradually has taken on more fixed network assets. Both Verizon and AT&T once were primarily fixed network service providers but have evolved to the point where mobile services drive revenue growth at both firms.

Vodafone, on the other hand, also has seen first hand the impact of a disruptive assault from a firm such as SoftBank, which bought Vodafone’s Japan operation and proceeded to attack retail pricing levels.

“Vodafone’s management may be looking at the U.S. and saying to itself, ‘We’ve seen this movie before,’”  Craig Moffett, principal of  Moffett Research, has said.

At least for the moment, those differences in assessment of market potential are going to have clear impact on firm strategies.

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