Following the Japanese unit’s dismal performance in the last fiscal year, the CEO of the Vodafone Group hinted at the possibility of divesting its operations if its business does not turn around. Once considered the star of Vodafone’s global operations, Vodafone Japan has steadily lost market share and its continued weak performance has left their management dumbfounded. Considering how Vodafone’s successes elsewhere in mobile applications such as Vodafone Live! was imported from its Japanese subsidiary’s more innovative products, the announcement clearly portrayed the precarious situation for Vodafone Japan. As the company continues to mix new product bundles in the market to gain and retain subscribers, it has also begun to consider a new business model—that of a Mobile Network Operator (MNO) to new entrants in Japan’s mobile market. There are already takers as Vodafone K.K. mulls the wholesale service business concept with Japan’s largest cable operator J:COM in initial talks with the carrier for a possible MVNO launch by the end of this year. Will this be the step forward for the operator?
The company has taken strides in the last two quarters. First it launched several innovative niche flat-rate pricing schemes comparable to its competitors. Second, there is a wider selection of 3G handsets to choose from. Third, it launched a PC-enabled service to facilitate faster music and video downloads. These have helped stem subscriber loss for the first half of the year (about two hundred fifty thousand lost subscribers), while resuscitating the carrier’s underperforming 3G service line.
Vodafone has moved into niches underserved by its competitors, prepaid and global access. While DoCoMo plans to eliminate its prepaid offering completely by 2006 and comprises only 2 percent of KDDI’s subscribers, Vodafone Japan’s prepaid subscriber base has grown to 11 percent of its current subscriber base. Looking at the trends, Vodafone’s prepaid growth is compensating a contracting trend in its postpaid subscriber base. Part of the allure of Vodafone Japan is the customers’ strong identification with international services (arising from its foreign brand). The additional billing of seamless roaming across countries will positively impact prepaid adoption.
By competing head-on with its mobile competitors through niche product pricing and expanding into the underserved segments of the market, Vodafone has increased its ability to defend its market. However, considering industry-wide movements arising from the additional spectrum to be licensed out this year and the upcoming implementation of Mobile Number Portability (MNP), being defensive will not be enough. Vodafone’s step back from retail to wholesale may mean jeopardizing the carrier’s healthy survival in the increasingly harsh competitive environment of the Japanese mobile market.
As an MNO, Vodafone risks cannibalizing its retail business. No matter how weak its performance has been, it is still the third largest operator in one of the most highly sophisticated mobile markets in the world, which gives added equity to the Group’s brand. By opening up its network to would-be operators, it risks opening up the market for more nimble and more aggressive competitors. These operators would most likely be looking at the same niches that Vodafone has recently entered. However, by becoming a MNO, Vodafone stands to gain a steady income stream while at the same time shifting some of its retailing burdens to MVNO operators. It is also notable that the company is not just about to open its network to direct competitors—the company retains control over its network and through this a means of entry into Japan’s mobile market. For instance, the J;Com negotiations were precipitated by the cable operator’s perception that it needed a wireless offering on top of its triple play offerings in order to remain competitive.
The reality is that Vodafone, being the only carrier that is solely mobile, will find it difficult to compete in a market where convergence is underway, where MNP is implemented, where new entrants have come in. While it can continue to offer its mobile services in the same way that it is doing now, Vodafone’s opportunities continue to narrow. Vodafone’s becoming a MNO is an opportunity-creating move. By opening its network, Vodafone’s market power will be increased—this translates to increased bargaining leverage toward its supply chain. Furthermore, Vodafone cannot compete significantly in a market where offensive plays by competition bundles product offerings across voice, data, access, and even on-demand entertainment services, in other words where the competitive advantage relies on the ability of the operator to cross-sell its services. Also, it will stand to make a better claim for Japan’s remaining unused 3G spectrum when it creates enough traffic—a good deal relative to the difficulty of gaining spectrum in Japan. It stands to reason that by becoming an MNO, Vodafone is exploiting avenues of growth and this would be beneficial for the carrier.
