When the world’s biggest mobile phone company in Vodafone and the telco arm of Hong Kong’s richest man, Li Ka-shing, do a deal, you know that it’s not aimed at maintaining domestic competition.
Given the current financial climate which has crunched companies as large as Vodafone and people as mega rich as Mr Li, the deal is either a way of curbing the flow of red ink, or ending competition with the larger Telstra and Optus.
It’s aimed at boosting returns for one or both of the partners, which has pleased investment analysts and should carry warning bells for consumers.
It’s a realisation between Vodafone and Mr Li’s Hutchison Telecommunications that the good old days of anything goes competition/build market share/strategic stake etc, are over. Vodafone will be the winner, and Hutchison will depart Australia eventually, with losses of well over $A2 billion.
Bigger rivals Telstra and Optus, controlled by Singapore Telecommunications, are quietly cheering because they reckon a combined Vodafone/Hutchison in Australia will cut the number of mad dog mobile operators to one and that the new merged group won’t be so frenetic a price cutter with cut-price deals, uneconomic plans and price caps.
For Telstra and Optus, it’s also good news for their growing 3G Networks: Hutchison, which was the first into the market with the 3 network, will be able to boost returns with the addition of the efficient Vodafone marketing team.
Vodafone and Hutchison have created a 50-50 joint venture — known as VHA — to hold their combined businesses in Australia, which have about 6 million subscribers with annual revenues of about $4 billion.
It will spell the end of the “3” brand in Australia, which analysts said could prepare an eventual exit of Mr Li from the Australian market. The ending of the 3 brand is a powerful signal that Hutchison isn’t in this market for the long term. And that could have ramifications for Test Cricket and the soccer and rugby union football codes.
It is also bad news for the free to air TV networks. The combined company won’t spend as much as the two did separately. The Nine Network with its summer test cricket broadcasts could be hit, as could Seven with its rugby union telecasts.
According to the companies, combining their back offices, IT and networks will save more than $2 billion in costs. Some of that has to be marketing spend, including TV, radio deals, outdoor, newspaper and magazine deals as well. The two companies refused to say how many of their 3,700 jobs would be eliminated, many of them in the two head offices. Together Vodafone and “3” run about 400 shops across the country, including the Crazy John’s stores acquired by Vodafone last year.
That will be bad news for some retail property owners at a time when tenancies are under pressure.
Vodafone’s global chief executive Vittorio Colao said: “This transaction will benefit customers in Australia as it creates a company with the necessary scale to compete strongly in the mobile market … This is an important step in the transformation of the Australian mobile industry.”
Hutchison has spent billions of dollars trying to create a beachhead in Australia. Vodafone has been far more successful.
It is another example of how business in Australia naturally contracts towards a small number of players so they can cut competition, costs and generate oligopolistic profits. Steel, transport, aviation and the media are some other examples.