While the announcement has been some time coming, I’m delighted to see that the commercial realities of 4G LTE investment have caused O2 and Vodafone to make a very wise partnership decision. Vodafone and O2 have announced that they will pool their networks of radio masts and antennas, which will accelerate their roll-out of 4G LTE services.
In reality, Vodafone and O2 had little choice, unless they were prepared to fail with LTE services due to severe underinvestment. I’ve written many times about the effect that having so many separate 2G and 3G networks has had on the UK mobile industry. 3G networks have suffered from severe underinvestment as mobile operators have tried to achieve their internal profitability targets. With mobile users spread among so many disparate networks, operators have simply not been able to gain the critical mass of users needed to justify, and sustain, adequate investment in either 3G or 4G network infrastructure.
The UK mobile industry moved a major step forward with the merger between Orange and T-Mobile to form Everything Everywhere. At last, we had a business entity that could create a viable business case for widespread and extensive deployment of LTE.
However, the move by Orange and T-Mobile left Vodafone and O2 very exposed, particularly as substantial mobile revenue growth (forecast by industry analysts back in the early days of 3G) has failed to materialise. Growth in data revenues has, at best, only been able to keep pace with the substantial declines in voice revenues caused by intense price competition and regulation. While the business cases for early 3G deployments were made on the basis of often-ridiculous revenue growth assumptions, operators have learnt to be cautious this time.
Without substantial growth in revenues to justify huge LTE investment, 4G business case viability now demands dramatic reductions in network infrastructure costs. There’s only so far that mobile operators can go in pushing network infrastructure vendors to reduce their prices, as demonstrated by the dire profitability levels of vendors such as Nokia Siemens Networks. So, network sharing is the only realistic path.
Before Orange and T-Mobile announced their intention to merge, I was fearful about the prospects for the UK mobile industry. At the time, Ofcom was continuing to strongly promote the competition benefits of having a substantial number of separate networks, and it seemed highly likely that the UK industry would enter another prolonged period of network underinvestment – one in which the UK would languish near the bottom of the international LTE league table.
The Orange/T-Mobile merger heralded a fresh approach that has finally destroyed the unviable industry structure that previously existed.
It is early days with the Vodafone and O2 relationship, and it is important to note that this is not a full-blown merger. However, there is much to be cautiously optimistic about. Vodafone and O2 intend to share a combined network portfolio of 18,500 masts. Vodafone and O2 claim that their partnership will accelerate their plans for widespread LTE deployment, so that they will be able to cover 98% of the population with LTE by 2015. Vodafone and O2 also plan to extend existing 2G and 3G coverage.
At last, we have the prospect of LTE being deployed extensively by more than one operator by the end of 2015, although the UK still has to hold the spectrum auction (which has already suffered significant delays).