Vodafone's reality check

Business Spectator

It was probably always only a matter of time before Vodafone Australia chief executive Bill Morrow brought the chainsaw out and mounted an all-out assault on costs.

The Vodafone network virtually imploded in late 2010, triggering an exodus of customers and a plunge into the red even as the group, essentially a joint venture between Vodafone and Hutchison Whampoa, was trying to manage a merger of their previously discrete businesses and a migration of  Hutchison's ‘'3'' network customer base to the Vodafone brand.

Morrow, regarded as a trouble-shooter within the Vodafone organisation, was brought into the business earlier this year with a mandate to turn it around within two years.

Until now he has focused mainly on ploughing capital into upgrading a network whose reputation was severely damaged by the chronic service quality issues that emerged in 2010 and which have gifted the best part of 800,000 of its customers to Telstra and Optus.

On Monday,  Morrow launched what is expected to be a substantial job-shedding program – up to 10 per cent of the group's 5000 staff – as well as a massive overhaul of his senior management team.  He has appointed a new chief financial officer, a new chief technology officer, a new director of strategy, transformation and business development and a new director of marketing.

The cost-cutting and management changes could be a sign of desperation but are probably more of an indication of where Morrow thinks Vodafone is in its efforts to stabilise and rebuild its brand and customer base.

Vodafone has been pumping capital into its discredited network and Morrow appears confident that both the stability of its network and its customer base are improving.  The upgrade, however, doesn't appear to have yet reached the point where Morrow is prepared to declare it complete, let alone competitive with Telstra and Optus, which are now rolling out their 4G networks.

It was instructive that when the iPhone 5 was launched recently Vodafone eschewed the opportunity to exploit the launch to win back some of its lost market share by aggressive pricing. That probably indicated that Morrow didn't believe Vodafone or the network were ready yet to take on new customers with heavy data requirements and  an expectation that their operator will fulfil them.

With an alliance with Optus and the dissolution of a joint venture with Telstra that will give Vodafone control of more base stations, along with the massive amounts of capital it has been deploying to improve its network, the group should be in a stronger position to compete for customers and market its brand next year. It will have much better coverage and a more stable network.

A business that is losing money and customers but still investing heavily has no option but to attack costs. With suggestions that Vodafone Australia might seek more capital from its shareholders – which it will probably needs to roll out a 4G network – shrinking the cost base to create the potential for acceptable returns at some point in future would have become an imperative.

In fact, even if Vodafone hadn't experienced the issues it has it the past two years it would probably still be focussing on costs.

Optus has been attacking its costs as the effects of competition, the impact of expensive handsets on customer acquisition costs, soaring data usage, higher mobile termination charges and the investment required to shift to a 4G environment have mounted. These are high fixed cost, capital-intensive businesses where there are margin pressures as data usage continues to climb.

Morrow's re-built team will be well aware that the Vodafone brand can't be restored quickly or through some slick marketing. The network will have to be able to deliver with absolute reliably to its current, reduced customer base before there's any point in trying to add significant numbers of new customers.

The iPhone 5 launch could have a perfect moment for Vodafone to have gone onto the front foot, had it been in a position to do so. Telstra had, and has, a lot of iPhone 4 customers it needs to recontract and therefore was to some extent vulnerable.

Still, Morrow and his team would be well aware that the smartphone cycle – and the Apple cycle in particular – is such that there will be more opportunities to attack  in future if Vodafone can properly get its act together and re-establish its brand. With 2012 almost gone 2013 is looming as a decisive moment for the future of the Vodafone Australia business, a year in which it tries to start growing again while materially reducing its costs.