Google Should Buy Vodafone Share of Verizon Wireless - The 45 Percent Solution

By Peter Bernstein October 19, 2012

I will get to the headline in just a minute. But, before I do a little context is in order.

After two articles yesterday on Google’s earnings perceived “disappointment”, and my view that Wall Street overreacted, I woke up this morning and Google was still on my mind.  In fact, so much so it caused a flashback to the 1965 #1 box office hit by the San Francisco-based group the We Five and their remake of Ian and Sylvia’s “You Were on My Mind.” 

Image via Shutterstock

The song is the stuff of 1960s legend. It challenged the “British Invasion” (Beatles, Rolling Stones and a host of others) that was starting to dominate the U.S. charts. If you have not heard it, here is a link. I defy you no matter your age to not tap your feet and sing along. As it relates to Google and why the lyrics resonate below is an abbreviated version:

When I woke up this morning
You were on my mind
And you were on my mind

I got troubles, whoa, oh
I got worries, whoa, oh
I got wounds to bind

I will not go over the previous ground covered, except to note I am sticking to my contention that ultimately the world is about judging the success of ecosystems. Google appears to be winning the war to have all of us never leave their “E”vironment. This includes fellow collaborators who like Google are in it for the long-haul and don’t get too excited about minor battles perceived as lost such as yesterday’s mischaracterized earning “disaster.” Their strategy of focusing on making the multi-screen world simple for the end user and advertisers is spot on, and they really are coming at this will a superior set of capabilities including those of Apple, Microsoft and Facebook.

Mobile monetization

Google got blasted for seeing it mobile ad revenue on a per click basis decline and for its failure in under 160 to turn its Motorola acquisition around. The former took Facebook down for a steep ride as collateral damage became the order of the day. The later, to the company’s credit, is very much a work in progress and one quarter is insufficient evidence that Google should, as some analysts are already out suggesting, cut its losses while it can.

The buzz today is about mobile monetization. Google is being penalized for falling short, mostly because of that click per mobile ad number, but such a narrow focus by the financial community misses the point. Reality is the various screens, because of the user experience on them, are not going to have identical click throughs. This means, as discrete value propositions things like smartphones just can’t generate the kind of ad engagement of desktop display ads, i.e., they are not going to command a price premium. However, as the user experience becomes enveloped in an “E”vironment, where advertisers are offered the ability to target the user and all of their devices because of the integrated experience (desktop, smartphone, tablet, TV) to put it bluntly the hubbub about mobile clicks will become literally yesterday’s news.

This is not about the monetization of mobile, although I liked Google’s lumping of its content and apps into their monetization of mobile calculus since this should be looked at holistically. It is about the monetization of the ecosystem.

Owning the customer experience is the key

Not that long ago I posted on our contact center solutions site my views on the seemingly sudden industry focus on the customer experience. The title tells you all you need to know, “Who Owns the Customer Experience? Hint, Customers Do.” Reality is that we all ultimately, based on perceived value, are going to dictate how much of our hearts, minds, time and money any “E”vironment ecosystem can extract from us, however, from a business perspective what that means is that the most important quest is to obtain the dominate share, including that all important “first-look” that will go to whom I trust to host my electronic personae.

Let’s just say that Search and a Chrome browser are nice anchors to have when going to war. But, I digress. 

Why Google should Buy Vodafone’s share of Verizon Wireless

The challenge of owning as much of the customer experience as possible is the logical segue to why Google should consider buying the Vodafone 45 percent share of Verizon Wireless. Interestingly, my old friend and colleague TMC Contributing Editor Gary Kim, made a similar pitch in a recent posting, ”Should Facebook Become a Mobile Service Provider?”   He makes a nice case. I think the case for Google buying the Vodafone stake is more compelling and possibly more urgent given Wall Street grumpiness as well as manifest destiny and economics.

Larry Page on his analyst call said two things of relevance here. First, when asked about why Google was becoming a fiber optic network provider in Kansas City, he noted that he was not “a patient person” and that he wanted to push the envelope on what the Internet could and should be. The notion was that Google’s participation in the market would act as an accelerant, and it left open the possibility of acquisitions if the business case for ownership of a fixed landline network makes sense. In other words it is a test.

Second, after making the case for a multi-screen world, the importance of mobility as a disrupter and the fact that we are in essence on the bottom of the on-ramp of the learning curve of what all this disruption caused by smartphones and tablets may bring, he implied that the investment in Motorola really is an instance of you have to be in it to win it, and Apple has proven that devices are important when looking at the user experience from an “E”vironment ecosystem perspective. That is where taking the Vodafone share of Verizon Wireless comes in. with ownership would come benefits and privileges. Here are just a few:

  • The network exists
  • Verizon has physical stores which Google should have for a host of reasons too long to enumerate here if it is to compete fully with Apple, and Motorola needs better shelf space if it is to survive
  • How about Chrome as the default for all those Android devices
  • Verizon has visions of opening up foreign markets including China (where Google is persona non grata but that could be changed)  
  • A purchase of the Vodafone share at a time when policy-makers might be concerned about Softbank’s acquisition of Sprint and the speculation that this could lead to MetroPCS and T-Mobile being on the energized Sprint’s “to acquire” list would be a nice bone for the politicians to munch on.
  • Another round of industry uncertainty would be kicked off as Apple and Microsoft as well as Facebook might have to consider buying AT&T in the ultimate Star Wars scenario.
  • Who would Verizon Wireless like to have as a large minority shareholder, Google or Vodafone?

I could go on, but you should get the picture. It can be summed up in four words, “strategically it makes sense.”

“But is Vodafone willing to sell?” you ask. Great question!. Here are some things to consider. 

  • Verizon owns 55 percent of Verizon Wireless and derives two-thirds of its revenue and three-fourths of its EBITDA from the unit. Vodafone's 45 percent stake accounts for one third of its revenue and one third of its EBITDA.
  • Vodafone shares have been under duress for quite a while and not just because of the economic problems in Europe. 
  • The company’s 7.6 percent dividend yield is the highest of the London Stock Exchange’s blue-chips, and account for a 3 percent total of the index. How to keep that dividend high and paid is a challenge.

In the face of this challenge, analysts in the UK are urging Vodafone to cut its dividend to a level that was covered by its non-Verizon business and use the Verizon cash to fund bonus payouts. Barclays, a not disinterested party to Vodafone’s finances, feels the company should keep its current dividend and use Verizon money to buy back Vodafone shares thereby reducing its payout burden. It cited for example that using half the cash from Verizon Wireless for buybacks would cut Vodafone’s annual dividend cost from £5bn ($80.0 billion) this year to £4.2bn (($67.2 billion) by 2018. That is billion with a “B”.

The Verizon/Vodafone relationship for those with a memory has had its moments over the years. There has always been a question about how, when and if Verizon should buy out Vodafone but valuation has been an issue that has been too hard to bridge. 

At the moment, Vodafone and Verizon could not live without the cash flow or profits from Verizon Wireless. And, without trying to do the math, (I am not a financial analyst and don’t wish to appear like one) there can be little doubt that any entity approaching Vodafone right now to sell its Verizon Wireless stake is going to face real tough negotiations over valuation.

Does that mean “no deal!” In a word, “NO!” For students of the history of the mobility industry in the U.S. there is one thing that is an absolute certainty, i.e., everything has its price. The only question on Google possibly making a move would not be whether they could afford to do so. Obviously, they can even with a momentarily deflated stock price but with plenty of cash in the bank.  What Vodafone might believe is a price that will give their share holders peace of mind is another question. 

The last question is very much worth asking. Vodafone’s share of Verizon Wireless could be just the 45 percent solution that could not only benefit Google greatly long-term, but in the short term drive financial analysts and competitors crazy, and probably set off another round of mobile industry restructuring. 

As noted at the top, I woke up this morning and Google was on my mind, and so was the theme song from the hit 1973 movie The Poseidon Adventure, “The Morning After.” As the Wall Street herd clamors over each other to see how much they can revise down their price targets for Google, it would be good to remind them that despite Mr. Page’s personal desire to speed things up, patience can be a virtue.     

Edited by Brooke Neuman
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