When Nick Read joined Vodafone as chief financial officer in late 2002, Vodafone controlled less than 60 per cent of its contract base directly. Non-exclusive indirect partners managed a large chunk of its billing and customer services.
Read handled the finances during Vodafones splurge on service provision, as it purchased a number of businesses and took their customers in-house. He also oversaw the withdrawal of its base from The Carphone Warehouse, which managed Vodafones commercial relationship with a number of its customers in the same way that it still runs things for a portion of O2s base.
Read has been UK chief executive for almost a year now an improvement on his two predecessors and his stewardship of Vodafone UK has coincided with the general network squeeze on third parties.
Read has led that rationalisation of the distribution and dealer channels, and Vodafone now takes ownership for 95 per cent of its customer base.
That, coupled with our drive on direct distribution and our alignment of commercial interests and customer lifetime value with our indirect partners, means we are leading this market place in post-pay churn, he said at an investor conference last week.
According to Vodafone, the churn level of its contract base is 18 per cent, five percentage points better than O2, its nearest rival. It leads the UK market with a 30 per cent share of service revenues and a 35 per cent share of profits second place goes to O2, which has a 27 per cent and 26 per cent share respectively.
Its good churn rate comes, by and large, from its lead in the high-value enterprise sector: it takes a 54 per cent share of the corporate market, 40 per cent of the SME market and 30 per cent of the small office, home office (SoHo) market. Again, these are all Vodafone statistics.
But the UK mobile industry has changed, and continues to change apace. Increased competition and regulatory intervention (see page 14) are driving network revenues down, and are forcing networks to rethink their acquisition and retention strategies.
Read admitted that, a year ago, Vodafone struggled with the new market conditions, particularly within the consumer sector.
We were underperforming in the market place and we needed to revise our strategy, he said.
If you take the inter-connect costs, plus the pressure on roaming, the profit pool in the UK for mobile is under pressure. Our competitors have come to market with bigger cross-network bundles, which have brought the price of voice and text down.
Because of our focus on profit, we were becoming uncompetitive from a price perspective, which led to a slowing up in our net customer growth and, importantly, a loss of high-value customers, which in the end stalled our revenue growth.
Vodafone went negative in terms of service revenue growth towards the end of 2005/06. If we had not readjusted our strategy it would have led to long-term profit decline, Read explained.
The new strategy, called simply Winning in the Market, was put into action nine months ago, and has seen the network cut down its roster of indirect partners.
The only remaining focus for the indirect channel, as far as Vodafone is now concerned, is SME and SoHo connections. Its deal with Dixons parent DSG, which will see it install data centres in 30 PC World stores, is aimed at helping it hike its share of the SoHo market to over 40 per cent.
We continue to build out our distribution in the SME and SoHo areas, said Read. The deal with PC World is another way for Vodafone to attack the SoHo market. Wed like to drive our percentage share of that market into the 40s.
As far as consumer connections go, Vodafone will continue its aggressive direct sales campaign, which has run at the near-total expense of the indirect retail channel.
We moved our direct strategy quickly in comparison with some of our competitors, and we think that our retail estate of 350 stores is the right footprint, said Read. We dont need to dramatically increase it, especially in a contracting marketplace.
At the same time, Vodafone is set to ramp up its own telesales and, particularly, online retail activity this year. Were running in the high single digits in terms of the percentage of active customers using our sites. Id like to see that pass 40 per cent in the next two years, he said.
It has rejigged all its tariffs, across both consumer and business, during the past four months. Read said Vodafones price plans will retain a premium, compared with those of rivals. However, there will also be a consistency of pricing from now, instead of the push and pull that has characterised Vodafones activity in the market to date.
Historically, we have been very inconsistent through the year, he admitted. Vodafone is in the market, it pulls out of the market to balance the margin. We want to build a consistent position, brand and experience in the market.
As for commission payments, Vodafone is, by stages, to switch its focus from traditional acquisition and retention fees to a new pay structure measured by customer lifetime value.
Longer contracts, as dealers complain, are pushing out upgrade cycles. The networks are starting to drip feed ongoing revenue to a select bunch of direct partners. The old days of big commission payouts are vanishing and Vodafone is showing the way forward.
We want good quality customers and we increasingly want to be on a risk/reward scheme with any indirect partners we work with, said Read. We are going to make fewer upfront payments of commission where we cant guarantee how long the customer will stay with us.
He added: Well also take opportunities where partners want more of a revenue share scheme to drive a Vodafone experience and PC World is a good example of that.
Vodafone: quad-play is a non-starter
Vodafones wholesale deal with BT to sell fixed-line broadband went live on April 1. But its management team said last week that the broadband market in the UK is too crowded to launch its own service and that a quad-play offering was a non-starter.
Vodafone chief executive Nick Read explained: There will be over-supply in the broadband market and pricing is only going one way, and so is margin. So weve taken a wholesale position, so we can ride that pricing curve.
We have positioned this from a defensive position until we see major traction in the marketplace, because we believe that we have other priorities to drive growth going forward.
He added that the network is seeing no evidence at all yet that there is a consumer need or demand for a quad-play offering.
Whenever we see someone try to sell multiple services in the same transaction, it is proving to be very, very difficult. I dont see those players at the moment getting traction, he said.
Vodafone UK strategy director Craig Tillotson said: The UK market is incredibly competitive in broadband. We want to make sure that the customer niche that wants both mobile and fixed-line from the same supplier can get that from us, particularly high-value customers. But we are not exposed to the fallout that were bound to see in the broadband market over the next couple of years.
Vodafone consumer business director Tim Yates said that initial feedback from the BT wholesale deal was good, and that 92 per cent of users were recommending the service to friends.
We are very happy with the BT partnership, he said. We have a number of customers who might be interested in getting a combined service of fixed-line and mobile from our base, and thats a good defensive position to have.