Analyst Commentary

• Vodafone and Telefónica's O2 UK say the new partnership will allow them to build two competing LTE networks faster than could have been achieved independently.

• The JV is a response to rival operator Everything Everywhere's plans to launch LTE services using re-farmed spectrum in the 1,800-MHz band before the end of the year.

Today we focus on three developments:

• United Kingdom operators Vodafone and O2 UK have announced an infrastructure partnership deal for the rollout of mobile services in the country, which will see the rival companies creating one nationwide grid, but running independent spectrum and services. UK giant Vodafone and Telefónica's O2 will pool basic network infrastructure costs to create one national grid of 18,500 base stations, with the aim of expanding their joint 2G and 3G coverage to 98% of UK homes by 2015. The agreement will lay the foundations for two competing 4G LTE networks, and hopes to allow both operators to deliver nationwide LTE services faster than they could achieve independently. The 50/50 joint venture (JV) set up by Vodafone and O2 will be responsible for the building of new sites needed to extend coverage into rural and remote areas, while existing basic network infrastructure will be transferred to the venture or decommissioned over time, resulting in a 10% reduction in sites used by the two operators.

• The Swedish regulator has opened a consultation on proposed cuts to mobile termination rates (MTRs) in the country, which could see the fees drop by over 28% if approved. Regulator PTS is proposing to drop the fees, which the mobile network operators charge each other to connect incoming calls, from the current 0.21 Swedish kronor (USD0.03) per minute, to SEK0.15. The regulator said that the proposals, which will affect network operators TeliaSonera, Tele2, Telenor and 3 Sweden, as well as leading MVNOs Lycamobile, TDC and Net1, will come into effect on 1 July 2012 if approved, and it is currently in discussions with the European Commission about the changes. Meanwhile, the European Parliament recently approved the latest raft of regulation of mobile roaming rates, meaning the first round of cuts to the fees will come into effect on 1 July 2012 (see Europe: 11 May 2012: Analyst Commentary).

• Czech CDMA operator U:fon has been put up for sale, by its creditors, with the sale expected to be concluded by end-August. U:fon was acquired by Divenno Holdings in February 2011 with the aim of using its combining it with existing fixed-line unit Dial Telecom (see Czech Republic: 9 February 2012: MobilKom to Merge with Dial Telecom in Czech Republic). The operational advantages Divenno was looking for failed to come to fruition as debts mounted. Creditors are looking to divest the unit before the LTE auction expected in the fourth quarter of 2012, in which the regulator aims to see a new player enter the mobile market (see Czech Republic: 17 April 2012: Czech Regulator Unveils Further LTE Licence Tender Details). A new entrant to the Czech market could use U:fon's existing towers to help its initial LTE deployment, in addition to roaming obligations on incumbent operators.

Our Take

Vodafone and Telefónica already have an agreement to share new network sites in the UK, and say the new JV will allow them to build two competing LTE networks faster than could have been achieved independently, delivering a superfast mobile broadband network up to two years faster than the regulator Ofcom has envisaged. However, the two competing operators say they will still run independent spectrum and competing services using the infrastructure. The JV is a response to the ascendancy of leading operator Everything Everywhere (EE), which has leapt to the number one spot in the UK following its formation from the merger of Orange and Deutsche Telekom's UK operators. EE is expected to launch nationwide LTE services before the end of the year after being allowed to re-farm some of its redundant GSM spectrum in the 1,800-MHz band—something that has drawn howls of protest from O2 and Vodafone, who say allowing the launch before the digital dividend auction will damage competition (see United Kingdom: 28 May 2012: Analyst Commentary). The long-awaited 800-MHz digital dividend auction has been delayed until the end of 2012, meaning the country is unlikely to see any network launches in the band before 2013.

As well as allowing the operators to accelerate their LTE rollout plans, the deal will help Vodafone and O2 UK keep costs down, at a time when they both face stagnant growth and increasing competition across their European markets. Vodafone recently revealed its full-year UK revenues had increased by 2.4% year-on-year (y/y), and has acquired fixed-line operator Cable & Wireless Worldwide to boost its capacity in the country (see United Kingdom: 22 May 2012: Analyst Commentary). Meanwhile, Telefónica saw its first-quarter UK revenues drop 3.9% y/y, while the deep recession in its key Mediterranean markets is putting the Spanish giant under further pressure (see Spain: 11 May 2012: Analyst Commentary).