Vodafone (VOD), the third largest operator in the UK, has announced it is in discussions to merge with mobile operator Three, the fourth largest. Together they would form the largest operator and Vodafone's view is that this merger would create “the necessary scale to be able to accelerate the rollout of 5G”.
True or not, Vodafone needed to do something to boost its return on equity. Last year, the company invested £10.5bn in capex to boost its 5G and fibre optic service. However, the return on equity was just 3.8 per cent. The problem with 5G is that its frequency is way higher than 4G. This improves the latency (the speed) but means you need more towers to cover the same area.
Companies can either build the infrastructure or create joint ventures. Either way it is expensive. The best way to make the investment pay is to charge customers more but at the moment this isn’t possible in the face of competition in the industry. To change this Vodafone is selling off assets in some low value markets – such as Hungary – and consolidating in the UK. This makes sense, at least for now.
The biggest concern for Vodafone shareholders is an announcement Apple (US:AAPL) made at its recent hardware launch when it said the new iPhone 14 would be using satellite-communications company Globalstar (US:GSTAR) to operate its emergency SOS service. This is the beginning of Apple’s foray into space. Reuters reported the company plans to invest $450mn in satellites – with most of the money going to Globalstar.
Although Apple only uses satellites for SOS messages currently, the potential is there to create its own communication network for iMessage and Facetime. This would put it in direct competition with SpaceX which just got Starlink operational in Antarctica – meaning it now covers all seven continents. CEO Elon Musk is planning on moving Tesla, which currently uses AT&T’s network, over to Starlink soon.
If Musk can move his hardware onto his own satellite communication network, then so could Apple. As the most popular smartphone in the world this would be terrible for Vodafone. The UK telecoms company has spent billions of dollars investing in 5G, fibre optic upgrades and most recently the acquisition of Three. In a matter of years, it could be worthless.
