VodafoneThree airs £1B savings plan that's a bad ad for open RAN

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VodafoneThree's Andrea Dona says open RAN would not have allowed the operator to hit targets.(Source: Iain Morris/Light Reading)

The tone struck by Andrea Dona, VodafoneThree's chief network officer, was almost mournful, but sacrificing open RAN will have seemed worth it. The UK operator would never have been able to build a 5G network with that technology at the conditional pace demanded by the Competition and Markets Authority (CMA) when it approved the merger between Vodafone and Three at the end of 2024. Admired as it was by Dona and other executives, open RAN had to go.

"The CMA have imposed very strict deadlines in terms of number of sites and in terms of spectrum solutions on those sites, by certain clear deadlines," Dona told equity analysts gathered last week to hear about VodafoneThree's latest plans. "Unfortunately, the current-technology open RAN roadmap did not enable us to meet those deadlines. That's why we took the difficult decision to abandon open RAN for now in the UK network."

Open RAN's standardized interfaces would have allowed VodafoneThree to combine parts from different supplier shops rather than buying all the products for a given site from the same vendor. The pre-merger Vodafone had planned to do that at about 2,500 sites served by Huawei. Due to a government order, the Chinese vendor's systems must be ripped out by the end of next year. Vodafone intended to replace it mainly with Samsung, mixing in some general-purpose IT equipment from Dell and Intel.

Way ahead

Facing those strict CMA-imposed deadlines, it ditched the scheme about a year ago, instead opting for traditional products from Ericsson and Nokia. "We doubled down on two main suppliers with a £2 billion [US$2.7 billion] contract, Nokia and Ericsson," said Dona. "They developed specific radios that meet our spectrum holding. They weren't available – they're developing that specifically for us, something that unfortunately the open RAN vendors could not meet."

A year on, VodafoneThree claims to be ahead of the CMA targets. While Dona would not disclose site numbers, describing them as "commercially sensitive," the operator's C-band network – based on frequencies in and around 3.5GHz – is currently available to 50 million people, he said. Controlling about 200MHz in that range, VodafoneThree also holds far more spectrum than either BT or Virgin Media O2 (VMO2), its two rivals, putting it in a stronger position to support high-speed connectivity for more people. According to its own figures, VodafoneThree has 437MHz across all the bands used for mobile services, with BT on 360MHz and VMO2 on 326MHz.

It also has more sites. When the merger was finalized, Vodafone and Three had a combined footprint of around 37,000 sites, versus BT's 20,000 and VMO2's 18,700, according to VodafoneThree estimates. Site rationalization would ultimately reduce the VodafoneThree number to between 26,000 and 28,000, said Iain Milligan, the operator's director of network development and infrastructure, in April. That would allow it to reduce costs but still leave it with a bigger footprint than either of its rivals.

Slides featured during its investor update last week show it has settled on the lower end of that range. It still expects to cover 99% of the population by 2030 with 5G "standalone," the version of the technology that introduces a new core, the brain of the system. That compares with coverage of just 60% in September. The regulator evidently has no issue with the lower site number. VodafoneThree has probably calculated that maintaining 2,000 more sites would not help it to grow sales. But it would certainly be more expensive.

Thanks partly to such pruning, VodafoneThree now forecasts annual cost savings of about £1 billion ($1.3 billion) by the 2032 fiscal year, up from its original guidance of £700 million ($926 million) by 2030. In its presentation on the numbers, the company said it anticipated "further savings as network build concludes," and it saw the "benefits of network rationalization."

Ericsson and Nokia forever?

None of this, however, is a very good advert for open RAN or Samsung, the technology and vendor that Vodafone Group says it is introducing in Germany and other parts of Europe. Open RAN was designed to increase choice and lower costs. But sticking with its original Samsung plan would evidently have taken VodafoneThree longer than switching to Ericsson and Nokia. No doubt, that would have entailed spending more, too.

Dona was careful to say "for now" in serving UK judgement on open RAN, but future big opportunities for anyone bar Ericsson and Nokia are hard to envisage. Next year is expected to be the year of "peak" capital expenditure for VodafoneThree, when it invests about £1.4 billion ($1.9 billion). It is not just removing a small number of open RAN sites but also taking out older 4G sites provided by Samsung for Three's network. Huawei must be entirely removed by the end of 2027, as well. Mobile equipment normally lives in a network for seven to ten years, but products are surviving into their dotage like blue-zone pensioners as operators try to boost returns.

The need to do that was a clear rationale for the merger that created VodafoneThree. As part of its update, VodafoneThree has said it expects its return on capital employed to exceed its cost of capital by 2032 and be "materially above" it by 2034. It is extremely unlikely to embark on another major upgrade in the early 2030s just a few years after overhauling its network.

Yet this period is when the industry expects operators to be rolling out 6G. One spectrum option for doing that is the upper 6GHz band, which UK regulatory body Ofcom is currently examining. A denser network would put VodafoneThree in a better position to use spectrum that does not carry signals as far. But blanketing the UK with expensive 6GHz radios would chew into profits. VodafoneThree seems more likely to do a software upgrade to 6G in today's 5G bands, with the hardware it is now deploying, and use 6GHz only for urban hotspots.

Judging by the uncertainty that still surrounds 6GHz, it does not figure in the operator's plan to increase network capacity by two and a half times between now and 2034. "We've consulted with Ofcom on the high-band 6GHz," said Dona. "Our representation to Ofcom is very simple – if you look at the projection, the data projection and the traffic projections, we need dedicated high-band 6GHz for mobile … I can categorically say that is valuable spectrum required for mobile and should be ringfenced for mobile."

Sad times for staff

Still, there is more to the latest savings plan than network rationalization managed by traditional vendors. By the end of 2028, it expects to have completely decommissioned the legacy IT systems used by Three. On the commercial side of the business, it is similarly rationalizing its distribution, logistics, marketing and sales activities. In retail, it aims to shut down more than 200 overlapping stores and reduce pre-merger costs by 30%.

None of that will make for a morale booster among staff and the cost-saving measures already appear to have had some impact on headcount. Vodafone's latest annual report put the average size of the UK workforce at 12,416 for the fiscal year ending in March. That means there were 1,716 or 12% fewer employees than Vodafone and Three had altogether in the previous fiscal year, judging by figures Three previously shared.

Some analysts sounded relatively unimpressed. Stripping out synergies, Andrew Lee of Goldman Sachs reckoned VodafoneThree's forecast implied earnings growth (before interest, tax, depreciation and amortization) of just 4% in the UK's three-player market. "Are you doing enough on cost efficiencies?" he asked executives.

VodafoneThree CEO Max Taylor obviously insisted the company is, while saying it might be able to go even further with AI. "When we look at one particular use case, we have some productivity gains from the use of AI in developing code in digital, and some of our tests have shown that that productivity gain could be up to 40%," he said. "Now, 10% is what we would have in our plans to cover inflation." The delta between those numbers is a potential opportunity, he explained.

Yet this could point to an even more aggressive reduction in staff numbers, and one that entails some risk given the latest anxieties about the newfangled software. After Elon Musk further rattled the sector with his latest satellite plans, Vodafone Group's share price fell 6% last week. It is not the reaction to its VodafoneThree update that senior management would have wanted.

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