Why Is This Telecom Rounding Customers' Bills Up?

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Vodafone (NASDAQ: VOD), the British telecom juggernaut, made waves with its UK customers a few days ago by changing its pay-as-you-go price structure.

Customers are up in arms, and with good reason. Vodafone broke the news to them via a text message.“Pay as you go pricing just got simpler.” That's what the message said, but what did it actually mean?

The red-hued network currently charges per second, but starting August 1, all calls will be rounded up to the minute. Even if a call lasts 1 minute and 2 seconds, 2 minutes will be knocked off its customers' available credit effectively doubling the price of that call

Who's to blame?

This is not the first time Vodafone has "simplified" UK customers' bills. Two years ago, it did the same thing on monthly contracts. Not only that, but it also pushed up the cost of some “out-of-bundle” calls by nearly 70%. So, why is Vodafone getting on its customers' nerves once again?

The network thinks that this way it's going to make things "simpler." It's easier to count how many minutes of balance have been left rather than counting seconds, as well. It also points out that customers will continue to enjoy great value as it provides them with a generous allowance of minutes. Nonetheless, its decision might have something to do with the not so up to par performance in the UK, as well as revenues being squeezed by disruptive regulatory reforms across the European continent.

No more chit-chats?

If we take a deeper look into the company's latest earnings release, we'll find that its UK customers have cut back on prolonged chit-chats. For the fiscal year ended March 31, UK voice revenues went downhill by as much as 7.4% at constant exchange rates while the respective pick-up in messaging and data revenue did not manage to break even.

In addition, regulated mobile termination rate (MTR) cuts across Europe have been causing major players a splitting headache. Brussels has been fairly keen about putting a lid on these rates charges mobile operators make to each other for connecting calls aiming to enhance competition and consequently give a breath of fresh air to consumers. Vodafone's organic service revenue in Northern and Central Europe experienced a 0.2% year-over-year drop. Excluding the impact of MTR cuts, service revenue would have been up by 1.6%. In Southern Europe, organic service revenue plunged by 11.6%, partly as a result of the region's widely known economic woes and partly because of the steep MTR reductions in Italy and Greece.

On top of that, recently, EU regulators rocked the boat by imposing more cuts, this time on international roaming charges. Despite phone operators and regulators being at loggerheads, the reductions came into force on July 1, making it cheaper to use a mobile phone while traveling within the European Union. Telecoms regulator Neelie Kroes is pushing to eliminate them altogether by next year.

Then, should we expect another nasty price hike from Vodafone?

Given the fact that Europe – and especially Southern Europe – is highly likely to remain stuck in a tight spot for the foreseeable future, such a business move wouldn't be the wisest thing to do. Instead, Vodafone is trying to lure European customers into its stores with strategic initiatives like Vodafone Red, its new approach to pricing. Vodafone Red plans combine unlimited texts and calls with ample data allowances for subscribers across 14 markets and are expected to attract 10 million clients by March 2014. 

Is there any room left to gallop?

There's been a lot of buzz for quite some time now about Verizon (NYSE: VZ) trying to bring Vodafone around to ditch its 45% share of Verizon Wireless, their joint-venture and leading mobile operator in the U.S. If that were to happen, Vodafone could be sort of left up the creek since its stake in Verizon Wireless brought in $13.2 billion in free cash flows over the past year, as well as a juicy $3.15 billion dividend just last month.

On the other hand, it would be a pretty sweet deal for Verizon. The US-based communications provider could double its mobile revenues in the blink of an eyeBut, thus far, such a deal has not been done and with the U.S. market approaching saturation territory, Verizon is looking to strike gold in the Canadian market. Reuters says that Verizon has come forward with an offer to buy Canadian telecommunications startup Wind Mobile and that it's also in talks with wireless player Mobilicity over a potential takeover.

Luckily, Vodafone has already set foot in over 30 countries, including major emerging markets, where there is still plenty of room to gallop. Last week, it revealed plans to expand its Vodafone Global Enterprise (VGE) business in Africa. Also, the company will be deploying Cisco's (NASDAQ: CSCO) end-to-end networking solutions to evolve to a complete Internet Protocol-based architecture in India.

Cisco, the go-to provider of networking equipment, sees immense growth opportunities in India not just for telecoms but for itself. Its estimates suggest that “there will be 2 billion networked devices in India by 2017, up from 1 billion in 2012, and mobile data traffic is expected to grow 60-fold from 2012 to 2017.” Consequently, upgrading to an IP network infrastructure should be a top priority for service providers in this country.

Looking ahead, Cisco is aiming to benefit from Indian telecoms' increased interest for small cell solutions, as well as from the rapidly growing pay-TV industry, which it has already managed to dominate by providing no less than 30 million Indian homes with enhanced TV-viewing experiences.

Should you invest in Vodafone?

Overall, I think it's a stock worth keeping an eye on. Its five-year stock chart could handily turn investors off, but when dividends are factored into the equation things are looking pretty good. Over the past five years, shareholders' gain from price appreciation and dividends received stands at 30%. 

VOD data by YCharts

Despite Vodafone's controversial relationship with Verizon and the gloom and doom in Europe, its diversified geographic position is definitely a huge plus. And on the European front, Vodafone does not give up a fight so easily. It might have caused a lot of hard feelings with its latest price hike, but its Vodafone Red propositions could generate fruitful results.

It has also agreed to buy Kabel Deutschland, Germany's biggest cable company, for which it will pay $10 billion in cash. This is the biggest bid Vodafone has made in over five years.

Apparently, Vodafone is wrapped up in reinvigorating its struggling fixed-line business, hoping to make a killing in the strongest European market. 

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Fani Kelesidou has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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