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Vodafone and Telefonica have announced plans to share their UK networks as they seek a cost-effective plan to provide coverage to 98% of the UK by 2015. The operators are to create a new 50/50 joint venture company that will consolidate their existing network infrastructure, and lay the foundation for further sharing on LTE.

We are not surprised at the deal, and had previously suggested that Vodafone and Telefonica needed to consider a network share in order to avoid being competitively disadvantaged following the merger of Orange and T-Mobile. While no details of cost savings have been released, Ovum estimates that combined savings of over £1bn across 2G, 3G, and 4G are achievable by 2015.

A decision that makes absolute sense

From the moment that Orange and T-Mobile merged to form Everything Everywhere, the competitive dynamics of the UK mobile telecoms market changed. Everything Everywhere inherited the MBNL structure between T-Mobile and 3, effectively creating a network sharing structure for Orange, T-Mobile, and 3.

By opting to extend their light-touch Cornerstone partnership, Vodafone and Telefonica have recognized that they were competitively disadvantaged in the marketplace compared to their rivals. As three of those rivals shared the cost of running a UK-wide network, Vodafone and Telefonica were each saddled with the cost of running a UK-wide network nearly independently. Over time, this extra cost burden would have hit their operating margins and prevented them from effectively competing with their rivals. 

Both parties can expect to save approximately 25% of their network costs

The beauty of the deal is that both Vodafone and Telefonica can look forward to saving at least 25% of their network costs. In a briefing with analysts, the CEOs of Vodafone UK and Telefonica UK opted not to disclose any financial expectations from the deal. However, they did concede that they are going ahead only because they see clear financial benefits.

Considering that Vodafone UK spent £575m in capex in the year ended March 31, 2012, this could lead to savings of over £100m per year. Over the three years from now until 2015, when both parties expect to achieve 98% indoor population coverage across 2G and 3G, the combined potential savings would be in excess of £600m.

By the time both parties roll out LTE, the potential savings would even be higher. The CEOs told us that the network sharing deal at the 2G and 3G levels, especially with the installation of single RANs, is laying a solid foundation for further sharing on LTE. If we assume that it could cost up to £1bn for each operator to roll out LTE in the UK, the combined potential savings for both Vodafone and Telefonica from this deal would be worth in excess of £1bn by 2015.

Ultimately, at least 50% of all LTE rollouts will use shared networks

While there is no certainty yet about how LTE spectrum will be divided up in the UK, this deal lays the groundwork for both parties to build out a single LTE network in the country. That means that, effectively, the UK is set to become a country with only two physical LTE networks: one from the Vodafone-Telefonica group and one from the Orange-T-Mobile-3 group.

Ovum is not surprised at this: since 2009 we have warned that the financial realities facing mobile telcos mean they have no choice but to share their networks. We posited that most countries will end up with not more than two networks. We also expect that at least 50% of all LTE network rollouts in the world in the next five years will involve some form of network sharing.