KGB: Vodafone's Bill Morrow

The Vodafone chief says his company will focus on improving services for existing customers before chasing new ones; Vodafone 'missed the ball' on the rapid growth of smartphones; and explains how mobile streaming may soon disrupt paid and free-to-air television.

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Vodafone Australia chief executive Bill Morrow tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

This year will bring significant improvements to Vodafone customers.

Australian banks went through a period of negative branding, they’re turning that around and Vodafone is taking notes.

Vodafone didn't anticipate the rapid penetration of smartphones in Australia and so ‘missed the ball.’

Mobile data may take a chunk out of paid and free-to-air television.

Bringing call centres back onshore is part of Vodafone's plan to win back customers through better service rather than lower rates.

Alan Kohler: Bill, welcome to Business Spectator. How are you going with your 4G?

Bill Morrow: You know what, we’re rolling it out. We’ve got our plans laid out and we’re pretty excited about the difference that we’re going to make here in Australia.

AK: It’s taken a while though, hasn’t it?

BM: Well, It’s an issue of following the market and, as we talked about once before, we know that there’s this love affair that Australians have with their smartphones and they want the fast, reliable speeds that come with it. We’re building that out now and we’re going to give it to them.

Robert Gottliebsen: Bill, can I just take you back a little bit? Both owners had a terrible time. You lost a vast…large amount of your customer base. How would you summarise what you did wrong? And what are the lessons for other people, who are in other businesses, that can be learned from Vodafone?

BM: You know, Vodafone of course was trying to do what they thought was right at the time. The market moved quite quickly here in Australia. I think we're the second highest smartphone penetrated market in the world now. I don’t think Vodafone saw that coming, as many others didn’t, and it just got ahead of them and it was an issue at about the time that they started to do the merger between Vodafone and '3' and so there were lots of things going on within the management team and, quite frankly, we missed the ball. That’s all changed. That’s a very different story now. This last year we have made volumes of improvements. Our network has extended coverage, It’s twice the speed that it was the year before. We have halved the dropped call rates and it’s just getting started now. This is going to be a significant improvement year for our customers.

RG: So, the lesson is that in today’s very fast-changing world, if you’re an owner taking a merger or some other activity, you can’t afford to not watch, very carefully, what your opponents are doing and what’s happening in the marketplace?

BM: That is spot on. You know, I have been a part of companies in turnaround situations, vast performance improvement and that is the very subject in itself. You stay focused on the market, what your customers are saying, what they need, what your competitors are doing, what’s the regulatory environment, what’s happening on the technology landscape and you have to be attentive to these issues and take advantage of that in a way that helps your business and serves the customer. You know, we have spent so much time talking to our existing customers, past customers, ones that even have never been a part of the Vodafone family and the message is crystal clear. They want a fast, reliable network where they need it most. They want to be able to get to the end of the month of using that network and not be shocked by the bill that they have to pay. And third, when they call somebody they want to be able to speak to somebody local. Those three things are top of our agenda as we’re rolling out the changes in Vodafone.

Stephen Bartholomeusz: Bill, you’re in the final phase of a billion dollar-plus capex spend on an upgrading network which has lost nearly a million customers in the last couple of years and which lost $800 million last year. Are your shareholders ever going to see a return on that investment?

BM: Well, of course. We had to put together a case that did offer a fair shareholder return for them. We went November last year and made our case for the plan that we’re implementing right now. Our shareholders are pleased with it. Clearly they want to be able to have a successful company here in Australia. They’re committed to stay here, but it has to be done in a way that can give them the return that they deserve. Any shareholder around the world has lots of options to be able to put their money in and if we can’t give them something above their cost of capital, they’re not going to put it here. That’s the difference in the case of Vodafone here in Australia. We have their support.

SB: By the end of the year that network upgrade will be fundamentally completed. You’ll have taken a big chunk out of your cost base, a third of the headcount or more. Are we going to see a price war?

BM: I hope not. I don’t think price wars are healthy for anybody. One can argue there’s a short term benefit to the consumer, but the way this thing all cycles back, as you’ve seen some indication in the way data price is working, the prices are starting to come back up. The companies need to provide a service. Competition is healthy. It forces us to innovate in new ways to lower our cost structures to pass on those savings to consumers. It forces us to think about new services that enhance what it is that we’re providing to the population. Without that you get people that end up being too greedy. I think this can be done in the right way that’s beneficial for all.

SB: If you don’t undercut Telstra and Optus on price, how do you win back those customers?

BM: Service. When it comes right down to it, most of the people aren’t considering just price in their decision. They need to have a network that serves where they want. They like to have that service that we recently announced of being able to speak to somebody local. And again, our concept, that we have studied, is that people are worried about some of the ways in which they use their mobile device and we need to remove that worry from them. For example, the announcements that we just recently made with our alerts and triggers, allows the customer when their using their allowance at a 50 per cent level to get a notification, so they know where they are within the month on how to control that usage. We give them another indication when they’re 85 per cent, so they can either go ahead and bolt on more capacity and increase their allowance or curb their usage and to take that worry out. And these are the things that’ll make the difference in a consumer’s eyes. Now, price value has to be there, but it’s all of these other elements that count.

AK: You refer to the fact that you’ve announced that you’re onshoring the customer service. Is what that really means, in fact, is that you had all these problems and you need to make it up to your customers, going to actually leave you with a permanently higher cost base because you have to have your call centres in Australia rather than in The Philippines?

BM: Well, and in fact it’s interesting. It’s not so much an issue of cost. It’s just doing the right thing of what customers want. 

AK: But it is more expensive, isn’t it?

BM: It is. Yes. I mean there’s no doubt about that. You can get far cheaper labour rates when you go over into some of these developing countries. But what’s interesting, when you actually look at the statistics about providing that customer care, is that they may not call back a second time, so in a way that role is part of the cost that you would have if you don’t have that quality level of service. And when customers are delighted to speak to somebody that they truly want to talk to, the call is often even shorter, again saving in money in certain ways. But we’re not doing this for economic reasons. We’re doing it because it makes sense for our customers.

AK: No, I mean, is what's really happening that the Vodafone stuff-ups that meant you lost so many customers also meant that you really have to build in a permanent cost disadvantage?

BM: Well, I wouldn’t call it a cost disadvantage. Again I think it’s a service advantage the way that we look at this. If you provide that premium service out there and if you can have a user imagery associated with your brand, customers are willing to pay for that and they’d still regard it as value. That’s our model as we have going forward. We’ve tested this with a few customers. We’re seeing a positive response to this. The announcement that we made about onshoring call centre staff, we have seen an overwhelming response from our customers that they’re thankful. They think that this bucks the trend that is caustic in our industry to go in the opposite direction, so hopefully people will see us as somebody that listens intently and then acts on what those customers want.

RG: Do you think David Thodey has made a fundamental error, and that’s his soft underbelly, that is outsourcing his call centre?

BM: I have a lot of respect for David Thodey and so I wouldn’t call that an error. I think that this is a smart move for the industry to be able to give customers what they want. I think it would be smart for others to follow in this path. 

RG: But that’s his soft underbelly, isn’t it? To get your customers back, you think that’s the way to hit Telstra hard.

BM: Well, I don’t focus so much on hitting our competitors. I focus on meeting the needs of our customers and I think we’re differentiated in this very issue by offering that onshore service, about giving them the kind of network they need where they need it most, taking away that shock factor on their bill. I think those are the issues that we’re hitting square on, what consumers in Australia want. That's how we’re going to actually turn this company around.

RG: Do you realise that what you’re doing is the same as the Commonwealth Bank and Ian Narev? He’s taking exactly the same view that 'I’ll pay the extra cost to have my call centre staff back here in Australia'.

BM: I think the banks have done an interesting job here in Australia. I love reading about them because they had to go through a transformation. What I found fascinating coming into Australia, having worked in seven countries on four continents, is that consumers here in Australia don’t really regard the telco industry in any high level. I mean none of the three carriers are really doing well from a brand image perspective. I think the banks went through this period where there wasn’t a positive of a view on their industry and they’re turning that around. And in fact we’ve looked and studied a couple of the banks out here and some of the moves that they’ve made and I think they’re good practices and you’ll probably see some more of our actions that will follow some of them.

RG: So, what did you see in the banks that you can follow?

BM: Well, one of them was that by just getting closer to their customer and their community. I found it interesting on the retail front how they completely went in and revamped that experience when they go in. Some of them even have a call centre action in the back where if you call, they’ll recognise your phone number, they’ll route you to that specific bank in that local suburb and you’ll talk to somebody on the line. The next time you visit they’ll say 'oh yeah, I talked to you on the phone' and that’s a very personalised service, very uncharacteristic of a lot of retail banks around the world. I think it was just a best practice and something we all ought to be thinking about.

SB: Bill, you’ve generated some controversy by being very critical of the industry fund and Telstra universal service obligation. Can you explain why you’ve been critical of it? And is it unfair that a wireless-only operator has to contribute?

BM: Well, first of all, my philosophy and approach is that we have a job to our shareholders, we have a job to our customers and even, you know, a certain responsibility to our employees. We also have a responsibility as the CEOs of the industry to change it, to evolve it in a way that makes sense. So, the idea of what’s happening, for example, on NBN where USO has been, it was an important way in which it was done in the past, but if you think about it, more people are more interested in having a mobile device than to actually have a fixed line connection, so shouldn’t our thinking evolve along with the changes within consumer demand? That’s all we are really trying to point out. We want to provoke in a positive way, not when it gets under somebody’s skin, about ways to think about the industry to serve Australians better, to serve the overall macroeconomic situation in a better sort of way. I feel that’s our responsibility as a company that’s present here in Australia and we’re going to continue to do that and we want to provoke and participate in industry-wide evolution.

SB: In response to your comments about the USA, Stephen Conroy likened you to Sol Trujillo. Did you see that as an insult or a compliment?

BM: Well, you know what, I’m not even going to comment on that one. I always thought it was quite interesting the response that was behind it, but I think there are many things that Senator Conroy and I share in terms of our beliefs about evolving the industry here, doing something better for consumers. That’s went and done in the past and I’ll leave that at that.

AK: Speaking of the NBN and the CEO of the NBN, Mike Quigley, recently made a speech in which he invited the industry to participate in the debate about what shape the NBN should be, so how about making your opening submission to that debate now for us? And do you think the NBN should be fibre-to-the-home 93 per cent and then satellite? Or should it be something else?

BM: Well, first of all I am a proponent of NBN. I think it’s a critical move that Australia has taken. Having worked in both the fixed and the mobile business for over 30 years, It’s really hard for a number of companies to try to build up fibre to a neighbourhood or to the premise and all three of those make any money. The economic profit pool just isn’t there for multiple carriers to do that. However, in order to keep the consumer in the right level with the right innovation, you have to have competition. The way that has historically worked and the way I believe that NBN has been designed is to be able to go ahead and take one source of funds, build that out, have a wholesale network that then other retailers can join on to be able to offer their services. And so I just commend the people that were behind putting that together. Now, whether it’s fibre-to-the-home or fibre-to-the-premise, you know, there are lots of debates and again I can remember back in the 80s actually leading a team that was looking at this very issue and it’s a complex one, but one that actually you need to put all the facts on the table and study what are the pros and cons, both economically, from a service perspective, from a reliability perspective, the way the networks evolve and upgrade. Each of those two technologies have pros and cons against them. I have to say I don’t think that that’s currently public, so I don’t know which side to actually lean on, but in principle I would say they both have merit. Usually you want to take an eclectic approach and use them according to the local areas. To be specific on this, we would all need to be able to assess that data before we can make an accurate call.

RG: Bill, is Vodafone likely to bid for the spectrum auction that’s coming up later? And what’s your view of the government’s indicative pricing?

BM: Well, as we have registered to participate in the auction, there’s not an awful lot that I can say about this. I have been public that at the 700MHz level, we are not going to participate in that. At the 2500MHz level, there is a little bit of interest, but it really depends on how things go within the auction process. The reserve price... that’s set. I think I understand where they derive those numbers. You know, from some of the US recent sale prices that went on there. I do think it is expensive, but then it depends on the carriers to whether or not it’s worth it for them to pay that money. For us at this point, it is not.

RG: If Telstra gets that spectrum that you are bidding for, will they have a long term advantage over you?

BM: I don’t believe so. We’re blessed with a nice spectrum position. We have a low band spectrum at our 850MHz. We’ve got the richest bid of 1800MHz which is probably the largest worldwide standard of deploying LTE and, as I talked about a couple of times, the beauty of the LTE standard has a 10MHz channel structure and a 20MHz channel structure. Vodafone here in Australia is the only one that has that continuous 20MHz to take advantage of that and what that really means is that you can get a higher theoretical speed and practical speed out of that 20MHz structure than the 10. So, in practice today we would be the only ones that could actually have that super high speed LTE network that’s out there.

SB: But Bill, that 1800 spectrum, that’s of primary use in the metro areas and you’ve got a lot more of that spectrum in the metro areas than Telstra or Optus. But if you don’t participate in the 700 spectrum auction, how do you service rural and regional Australia?

BM: Well, we’re actually working that through with the government right now. I think there are a number of other options at that 1800 level to be able to close some of those. The offset exists with the geographical footprint today. On top of that again there are other spectrum channels that you can use for LTE, so ultimately we can use it over multiple frequencies. Again, even our 850 we can deploy that over 850. There are other countries that are using that today. There are devices already out shooting out into the market for 850 LTE right now. So, we have several options to be able to serve all of Australia.

AK: Bill, around the world there’s a lot of rolling out of public wi-fi covering in some cases entire cities and in addition to that there are a lot of IP based phone services on smartphones. At what point is that stuff going to slice into your margins and everyone else’s margins in your mobile business?

BM: Well, first of all, on the wi-fi networks. I’m a little bit surprised here as well that Australia is a bit behind when you compare to Europe and the USA in terms of the number of hotspots that are out there. That’s real common to go out where your device may jump onto a wi-fi network when you’re out and about in a commercial zone of London or San Francisco, where we haven’t quite deployed that as much here in Australia. So, that’s less of a factor in the short term. I hope that actually it does evolve. I think there is merit in having an ubiquitous network that leverages both wi-fi to wide area wireless networks that we all deploy as carriers as well as some of the other technologies that are coming down the pipe. So, that’s the wi-fi element. As this evolves we’ll meld it into our business model. I don’t see it as ever eating into our profit margins as they’re structured today, but our business model will change to accommodate that. And, you know, as far as other technologies; over the top applications with…voiceover IP, as an example, and some of these apps that have different ways to be able to make a voice call, these are things that we actually have to embrace. We know that it’s going to become more and more of a digitised world, whether we’re talking about digitising our voice communications, accessing the social network sites, accessing information... more and more is going digital. There’s clearly a revolution taking place and we feel as a carrier we’re in a prime position because we know mobility is going to be a key part of that. Wi-fi is really a portable solution, not a mobile solution, so we think we’re in a good position, but we have to evolve with the times and we will do so.

AK: But those apps, those phone apps are free. They’re free calls. 

BM: Indeed they are. So, you have to make sure the carriers will price their data bundles to be sure of that, again of giving good value to the customer and still making their profit and that’s there to continue the investment. We’ve even spoken about this in the past, there’s going to be an evolution of pricing in the mobile space. I’m convinced of it. You know, the next five years we’re going to see a lot of change, not one that’s bad for the consumer. I really do believe that if you think about their share of wallet that they spend on various things around the household, that there’ll be some substitution. Maybe you're going to spend a little bit less on some of the TV channels that you buy or your cable services and you’ll spend a little bit more on your mobile data allowance that you have because you can get a lot of those types of services through that channel over that device. So, I think that evolution will occur and again we’ll see in our industry some changing in the pricing construct as a result.

RG: So, you think that the paid television network here and even the free-to-air television network will lose a bit of market share because of what you’re doing?

BM: I do. I’ve seen it in Europe and in the USA. If you just take prime time viewing as an example, there’s annual year-over-year declines that are growing quite rapidly and yet you see in times of economic despair people usually watch more television. So that offsetting issue is in fact due primarily to the fact that people have these broadband connections over their mobile services, over their fixed line services and those are typically over the top type applications.

RG: Are you planning a major marketing campaign when you’ve got the whole network ready and in place?

BM: Well, major is kind of the key word there. What we want to do is actually show our customers the different experience they can have with Vodafone and we want them to talk about it. So, we’re going to take quite a different tact this time around. We want to really earn a place of trust with our customers. We know that you can’t say a blanket statement because the technology is so different by geography, a handset has different performance than another handset that a customer may buy, so we want our customers to actually start to talk about it and then we’ll build off that with a campaign. I don’t like the word 'major' because we can’t buzz. You know, we have to be humble. We have to actually deliver here to our customers again. We’re not going to do a whole lot of television advertising until our customers tell us it’s time to do so. 

RG: So, your first aim is to get your existing customers to be experiencing your different service, enjoying it and then when you think you’ve got that right, that’s when you start advertising on a broader scale to get new customers?

BM: That’s spot on. Yes.

RG: OK.

SB: Bill, in a pre-plan market Voda’s only got about 20 per cent of the market. What’s the realistic expectation about what it could and should be?

BM: Well, we’re just over 20 per cent today and that fluctuates. You know, I am old enough to have been around enough to see where people that are on a pedestal get knocked off and people that are down feeling like they may not have a place to survive in an industry actually climb back up. Japan is a very good case in point there. That has been a radical shift and change of that large incumbent that was there before. So, we’re all going to fluctuate over time depending on what advantages that we have, how well we actually gear it. Maybe there’s going to be a technological advantage that helps any one of those carriers move their market position. Australia is going into a very different stage of wireless communication. We're about a 130 per cent penetrated today. If you look at analysts’views, they say you can probably max out at about a 150 per cent. And what that really means is that we’re going to see a different way of how you market to a customer and how a customer looks at their service. So any one of us, for example…They have two or three devices that we have today and the future realistically when you think about automobile, alternative appliances, we may have five or six, even seven different services where we have SIM cards stuck in some form of electronic device, but we each then should be seen as an account of how we look at this. So, penetration levels will in fact not grow because of the population situation, but the opportunity to grow is in fact going to be a key part of that. That ebb and flow between which carrier customers choose is going to exist for some time. I think again it’s a very different stage than what we’ve seen in the past.

AK: We’ll leave it there. Thanks very much, Bill.

BM: Well, thank you. Great talking with you guys.

SB: Thanks, Bill.

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Vodafone Australia chief executive Bill Morrow tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

This year will bring significant improvements to Vodafone customers.

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