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Instead, it needs to replace Verizon with something, perhaps smaller but with growth potential, that enables it to have control of the equipment, name and branding.

That situation highlights two dilemmas for Vodafone. First, does it need to be a global operator and if so, what is the best route forward in the world’s largest market, the US?

And second, convergence means that it has reached the pinnacle of its power and is in danger of racing downhill as the ‘mobile-only’ tag becomes a burden rather than the huge advantage it was a few years ago. Can Vodafone play in convergence without having its hands tied unacceptably by partnerships with wireline operators? On the first point, procurement power and support for multinational enterprises are just two reasons why there are still advantages to being a superpower. Even if we assume that the restive investors will eventually get their way, and that there would be benefits to breaking with Verizon, Sarin is right not to throw the baby out with the bathwater – the Verizon stake is profitable and generates major cashflow and is likely to get more valuable in 2006-7 as its US parent emerges from stagnation to be the most dynamic of the Bell operators.

The US market still has growth, with 70 per cent mobile phone penetration, compared to 100 per cent-plus in some of Vodafone’s core territories, such as Italy and Germany, which were poor performers in its Q3 figures.

New approaches

In the mean time, Vodafone could look for a more creative medium term route to remaining a player in the US market. It could take the obvious route of buying another cellco, but there few left on offer – Cingular is too large; T-Mobile has poor coverage and no 3G as yet; Sprint Nextel would be a dream match apart from different network choices, steeply rising value and no real motivation to sell.

Instead, Vodafone could learn some lessons from Sprint Nextel, which is using a combination of wireless technologies to seek to create a converged triple play of its own to challenge the Bellcos.

The US company is showing how it will be possible in future to have wireless-only fixed/mobile broadband convergence and multimedia, and if successful, it could restore the lustre to the ‘wireless only’ label and so, indirectly, benefit Vodafone. The UK giant is better positioned than any other to create a wireless-only converged model, with its buying power, R&D resource and brand, and this may well be its route to growth in the saturated markets, whether it uses an HSDPA with enhanced indoor coverage, WiMAX or some other combination of technologies. Such a strategy would put Clearwire firmly into Vodafone’s acquisition sights. In the game of fantasy operator, buying Clearwire for its 2.5GHz network and T-Mobile plus a handful of regional carriers for cellular would not be a bad way to piece together, Sprint Nextel-style, a system that would be greater than the sum of its parts in terms of US market presence and shareholder value.

Any deals in mature markets will be hard to do in the current investor climate though. Sarin labors under the reputation of being a ‘big deal man’ who wants to follow in predecessor Chris Gent’s footsteps and make huge acquisitions for Vodafone. Ironically, this reputation continues to hold him back, ensuring he is always regarded warily by his timorous shareholders, even while he has actually made only the most cautious of purchases during his reign.

Whether he goes or stays, Vodafone desperately needs to stand up to its exceptionally short termist shareholders, who complain that the company is treated as a utility stock while being entirely unwilling to take on the risk that goes with achieving greater growth and dynamism in a market as treacherous as mobile communications.

Wireless-only convergence, selected wireline partners in markets where this is impossible for competitive or regulatory reasons, rapid growth in new economies – such a combination could be a powerful prescription for putting Vodafone and its share price back on track. The global footprint ambition should not be too hastily discarded, just achieved using different means and ones that, in the twenty first century converged world, may create greater shareholder return. One thing the investors should realize, however – Vodafone will need daring and creativity to remain on top, not short term thinking and a refusal to take risk.

Copyright © 2006, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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