(*Underlying. All figures exclude goodwill.)

The major purchases have concerned US operator Airtouch Communications, bought for £43b in June 1999, and German operator Mannesmann, bought for £101b in April 2000. Billions more have been spent buying stakes elsewhere in the world of late, notably in Japan, Spain, China and France.

The American operations were combined in 2000 with those of Bell Atlantic to form Verizon Wireless (the current US market leader), in which Vodafone has a 44% stake. Significantly, Vodafone was also a whisker away from buying AT&T Wireless (the US number three) for £19b earlier this year, which would have prompted the disposal of the Verizon holding.

By March 2004, Vodafone had amassed equity interests in 26 different countries (either through wholly owned subsidiaries, associates or investments), with the majority the number one or number two operator. Partner network arrangements extended to a further 13 countries. Vodafone also claimed 133m 'proportionate' customers in March, up from 25m recorded five years prior.

Industry forces

So, the track record looks fine, but how does Vodafone score on Michael Porter's five 'industry forces' and the all-important sustainable competitive advantage? Barriers to entry should give buy and holders plenty of comfort.

First up is the capital requirement -- it costs a lot to build and run a global telephone network. At the end of March, Vodafone carried tangible fixed assets of £18b. In contrast, rival mm02 (LSE: OOM), which only serves the UK, Ireland and Germany, owned £4b at the end of December. With lengthy payback times and the industry turmoil seen over the last few years, finding the necessary billions to expand into new territories is likely to prove very difficult for Vodafone wannabes.

Start-ups networks will also face some infrastructure constraints (e.g. where to put the thousands of new base stations) and may have to play catch up with numerous technical issues. But the key barrier mobile operators enjoy involves the telecommunications spectrum.

Newcomers just can't set up shop and use whatever frequency they like. Spectrum availability and suitable frequencies are inherently limited and operators have to meet the many requirements of the appropriate national regulatory authority before they can start trading. The most high profile example of spectrum restriction comes in the form of a 3G licence, whereby in the UK for instance, only five such permits were granted. Whichever way telecom licences are issued by authorities around the world (e.g. by auction or beauty parade), industry leader Vodafone should always be in the running.

Emphasising the barriers is the following table. Extracted from Vodafone's 2004 annual report, the group's network rivals can be counted on one hand in every country of operation:

(*National operators. Excludes seven regional and 'numerous' local operators.)

Of course, so-called 'virtual' network operators can easily leapfrog the barriers. However, such operators still have to buy their wholesale network time from somewhere and the number of networks in most countries won't change anytime soon. Indeed, a letter in the Financial Times last week from Ian El-Mokadem, boss of telecommunications at Centrica (LSE: CNA), suggests the network owners (in the UK at least) have the upper hand: "The reality is that the network operators are able to restrict competition in the market by controlling access to their networks and the result is that customers are often paying far in excess of what may be termed a reasonable price for certain services."

In terms of product substitution, Vodafone and other network owners may suffer from mobile satellite services (such as Inmarsat) in the distant future, but visualising the mass-market adoption of these particular products ought to be left to the likes of Arthur C. Clarke.

Another plus for Vodafone is not relying on a handful of powerful customers for success. In fact, about half of Vodafone's 133m-customer base is of the prepaid variety, which gives added predictability to company profits. The cost for individuals is relatively small as well. Average revenue per user in the UK is about £26 per month, with £33 in Japan and £17 in Germany. Gloomy economic conditions should not therefore herald a sudden drop-off in volumes or profits.

Vodafone's 'churn', a measure of how many customers disconnect during the year, suggests the rivalry between existing industry players is significant. Across Vodafone's principal networks, the churn rate runs from between 17% in Italy to 30% in the UK. But with mm02 also recording a 30% churn rate in the UK (and 19% in Germany, similar to Vodafone), it may simply be a case of 'what goes around comes around', with Vodafone no doubt also picking up its fair share of subscribers from other networks.

Despite the high churn, Vodafone's UK customer base has grown by 7% over the past two years (albeit helped partly by acquisitions), with their average spend up 12%. Nevertheless, it's clear there's little to stop customers finding a cheaper deal elsewhere and moving on.

For the outsider, judging how much muscle suppliers to the telecom industry can flex is difficult. Groups such as such as Nortel, Siemens and Ericsson are no pushovers and any revolutionary technology they may develop could put them in a strong negotiating position. That said, Vodafone's size should make it a key customer for any supplier and ought to allow the company to hold its own in any dealings.

Other risks

General competition aside, the main threat to Vodafone is industry regulators. OFCOM for instance recently dictated a 15% cut in termination charges and caused UK revenues of £300m to disappear. Many other national regulatory authorities have also implemented (or are looking to implement) similar tariff reductions. Nevertheless, an active regulator is always a double-edged sword to shareholders, suggesting the sector is not ultra-competitive and therefore has some attraction for buy and hold investors.

Growth

Unlike many Qualiport-type shares, Vodafone offers the prospect of superior long-term global growth. The following statements, taken from Vodafone's 2004 annual report, give a flavour of the potential:

"Today wireless technology only reaches one fifth of the world's population. In fact, two billion people have never even made a phone call."

"In the coming years, the increasing number of mobile customers will enjoy a very different range of services. With the arrival of 3G and other new technologies and the significant increase in voice capacity and the data rates they provide, the opportunity for growth in this industry is tremendous."

"Today, only about 20% of voice usage is mobile, so we can expect some portion of the remaining 80% to migrate to our networks."

Summary so far

Going on this 'big picture' review, Vodafone stacks up well. The pros are operational visibility and predictability, the track record of growth, the future prospects and the barriers to entry for competing networks.

On the downside, customers can easily switch to rival networks (and virtual networks) and regulators can intefere with profits. But the main negative perhaps is Vodafone's acquisitive nature, which reared its head earlier this year with AT&T Wireless. Past purchases are said to have destroyed vast quantities of shareholder value and next week's Qualiport will investigate this claim further.

Where next? The Ideal Qualiport Company | Top Quality Telecoms