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What Is Vodafone Group plc’s “Prisoner’s Dilemma”?

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Vodafone’s (LSE: VOD) CEO, Vittorio Colao, has warned that the group is now facing a “prisoner’s dilemma” as the company’s peers work to offer customers bundled television and broadband services.

Vodafone is worried about the quad-play arms race. Quad-play packages offer consumers a mobile contract, pay-tv package, broadband and landline connectivity in one package, making the all-in-one package cheaper for the consumer and more convenient.  

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Simply put, the prisoner’s dilemma puts Vodafone in a precarious position. All of the company’s peers are trying to secure exclusive content, which has trigged a telecoms arms race. Vodafone can’t afford to stand by and watch — it has to compete and offer the same kind of deals. If the group fails to compete effectively, by cutting prices and bundling services to attract customers, then it stands to lose out. 

Complex situation 

Unfortunately, things are only going to become more complicated for Vodafone now that BT (LSE: BT.A) is entering the mobile market. Indeed, BT already holds a dominant position within the broadband and pay-tv markets and the company’s rumoured acquisition of a mobile network is going to make things really difficult for Vodafone in the UK. 

It’s been revealed this week that BT has been in talks with both Telefonica’s 02 and with EE, which is owned by Orange and Deutsche Telekom, regarding the possibility of acquiring either Britain’s number one or two mobile operator. There’s no need to say how problematic a deal like this could be for Vodafone. BT already controls the UK’s broadband and fixed-line telecoms infrastructure. If the company purchased the UK’s largest mobile network it would have unrivalled economies of scale and pricing power. 

Further, as one of the market’s smaller players, Talktalk (LSE: TALK) is really threatened by this new development. 

First mover

Talktalk had been a first mover in the quad-play market. This month the group announced that it had inked a deal with Telefónica, allowing the company to offer customers a mobile SIM as standard with TV packages for no additional cost.

According to TalkTalk’s last update, 10% of the company’s customers had already accepted quad-play packages, with many moving on to the company’s mobile service. What’s more, the group has a total of four million additional broadband customers to which it can offer its quad-play bundles.

However, now BT and Vodafone are both being forced to enter this market, there’s a chance that Talktalk could be squeezed out as the two telecoms giants fight for market share.

The bottom line 

As the quad-play bundle takes off, Vodafone is facing a dilemma. The group has to decide whether or not it will get involved in a quad-play price war for customers, which could dent profits.

Unfortunately, the company’s hand may be forced if it wants to maintain customer loyalty. 

Nevertheless, Vodafone is one of global telecommunications sector’s largest players and the company’s size and global diversification will give it an edge over its peers.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Vodafone. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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