Vodafone and O2 will share a network in Britain to cut the cost of building a new superfast service, leading the way in a likely shake-up of a sector that is battling falling revenues and high investment costs.
Europe's telecom sector is chasing ways to meet the rising cost of keeping pace with technological advances and customer demands, with tie-ups and co-operation deals the order of the day; the arrival of emerging markets billionaire Carlos Slim on the European telecom scene is also ramping up the pressure for consolidation.
Vodafone (London) and O2, which is owned by Spain's Telefonica (Madrid), said they would form a joint venture in Britain to pool their infrastructure to improve coverage and speed up the roll-out of a fourth-generation network.
Analysts said the pair's move could be replicated in other European markets such as Spain and Germany, which could have a knock-on effect on other operators struggling with fierce competition, regulatory pressure and weak consumer spending.
"This will create two stronger players who will compete with each other and with other operators to bring the benefits of mobile internet services to consumers and businesses across the country," Vodafone UK Chief Executive Guy Laurence said, adding that it would give Britain the 4G networks it will need tomorrow.
The agreement will also help O2 and Vodafone, ranked second and third respectively in Britain, to compete with market leader Everything Everywhere (London), which runs the Orange (Paris) and T-Mobile brands, in the fight to have the best network.
The smallest operator, 3, has a network-sharing deal with Everything Everywhere.
Vodafone and O2 already have a more basic sharing agreement in Britain, and the deal to pool basic network infrastructure will increase their national coverage to 98% by 2015 and speed up the roll-out of fourth-generation services, they said.
Vodafone estimates that around two-thirds of the population currently have access to third-generation indoor mobile coverage, and the government has been calling on operators to increase that reach to make the country more efficient to boost the economy.
"Faced with a host of macro-economic and sector threats, the European Telecom sector is finally addressing some of the basic business model problems they face and laying the groundwork for a much more profitable recovery," Bernstein analyst Robin Bienenstock said.
"With further overlap in Ireland, Spain, Germany and the Czech Republic, this could pave the way to more active network sharing across their footprint. Vodafone and Telefonica are the only companies that could pursue this strategy in a game-changing way."
Vodafone's Laurence and O2 UK boss Ronan Dunne said they had singled out the new approach for Britain where consumers have led the way in the move to mobile broadband services.
Analysts said the deal made particular sense for Telefonica, which is under pressure to cut its debt pile and is currently stepping up plans to sell assets.
"Exceptional customer demand for the mobile internet has challenged the mobile industry to consider innovative solutions," Dunne said. "This partnership is about working smarter as an industry."
Whether the two groups expand the network sharing approach to other markets such as Spain and Germany will likely hinge on the outcome of a power struggle at Dutch telecom operator KPN (The Hague, Netherlands), which owns Germany's third-largest operator E-Plus. KPN has said it is open to selling E-Plus to ward off a raid by Mexican billionaire Slim, and analysts say Telefonica is the most likely bidder, since a combination would generate roughly $5 billion in synergies.
"To the extent that Telefonica may or not be involved in any outcome of KPN's strategic review of its German business, the announcement today places incremental pressure on KPN to come to the negotiating table," Bienenstock said, explaining that Telefonica now had another viable option in Germany.
A network-sharing deal in Germany between Telefonica and Vodafone could leave KPN in trouble, faced with rivals with deeper pockets to invest in network expansions and faster mobile technologies. KPN is the only German operator that missed out on buying the best mobile spectrum needed for fourth generation mobile services.
"All these press releases are deliberately timed," Espirito Santo analyst Will Draper said. "Putting it out now sends KPN a clear signal. It says Telefonica has a good relationship with Vodafone and it would be possible to do this in Germany, too.
"It gives Telefonica another negotiating chip when they talk to KPN on the valuation of E-plus in Germany, and this puts KPN in a slightly weaker position in talks."
(Reporting by Kate Holton; additional reporting by Leila Abboud; Editing by Will Waterman)