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The ?300m mobile rip-off

THIS week both Vodafone and O2 released their end-of-year key performance indicators (KPIs). According to O2, its average revenue per user (ARPU) in Ireland is now up to ?572 per year, while the number of customers it has in this country rose by 6 per cent to 1.602 million during the 12 months to the end of 2005.

Unfortunately O2's larger rival Vodafone doesn't publish similar detailed information on the Irish market. The last information from Vodafone on the state of its Irish business was contained in the company's interim results for the half-year to the end of September 2005.

At that date, Vodafone had 2.013 million Irish customers and its Irish ARPU was ?53.10 a month or ?637.20 a year. By comparison, O2 had 1.57 million Irish mobile phone customers at the end of September 2005 and an ARPU of ?572 (?47.66 a month).

The flow of Irish financial and other information coming from O2 is much better than anything being provided by Vodafone. The company, currently being taken over by Spain's Telefonica, also publishes sales and profits figures for its Irish operations. For the six months to the end of September, O2 had Irish sales of ?472m and operating profits of ?127m. Annualise those numbers and you are looking at a turnover of ?944m and operating profits of ?254m.

While Vodafone doesn't publish the same figures for its Irish operation it is possible to make an educated guess. At the end of September 2005, Vodafone had 28 per cent more Irish customers than O2. On a pro-rata basis that translates into an Irish turnover of ?604m and operating profits of ?163m for Vodafone during the six months to the end of September last year. Over a 12-month period, that works out at something like sales of ?1.208bn and operating profits of ?326m.

This is almost certainly a serious underestimate of Vodafone's Irish profits. It has many more customers than O2, and those customers pay it far more than those of its main rival. While O2's ARPU is ?47.66 a month, over at Vodafone the ARPU is more than ?5 higher at ?53.l0. That's an extra ?65.28 per customer per year. Add it all up and it comes to ?131m.

As a capital-intensive business, most of Vodafone's costs are fixed. This means that any extra revenue flows directly to the bottom line, giving the Vodafone Irish operation profits of about ?457m a year. Add it all up and the two main mobile companies are making annual operating profits of about ?711m in Ireland.

By comparison, the annual operating profits of Eircom, the main fixed-line company, were ?118m for the year to the end of March 2005 - just a sixth of the operating profits being earned by the two main mobile phone companies. Maybe Eircom's many critics should be directing at least some of their fire at the mobile phone companies instead.

Not alone are Irish mobile phone company profits much higher than profits from fixed-line telephony, they are also much higher than the profits being earned by the mobile phone companies in other markets.

If the ?457m figure for Vodafone is accurate, then its Irish operating margin is a massive 38 per cent. While O2's Irish operating margin is lower, it is still a very healthy 27 per cent On the other hand, Vodafone's global operating margin is 24.5 per cent while O2's global operating margin is 13 per cent.

Applying Vodafone's global operating margins to its Irish business would cut operating profits being earned in this country from something like ?457m to ?295m, a reduction of ?162m, while O2's Irish operating profits would dip to by ?132m to ?122m.

The massive margins being earned by Vodafone and O2 in this country are costing Irish mobile phone users about ?300m a year. If the mobile phone companies were to cut their Irish margins to the group average, Vodafone customers would see their annual bills falling by an average of ?80.47 (?6.71 a month), while O2 customers would end up paying ?84.07 less every year (?7 a month less).

Further proof that Irish mobile phone users pay over the odds is provided by the fact that the average European ARPU is just ?30.26 a month (?363.12 a year), compared to an Irish average of ?47.37 (?568.44 a year). Ireland's ARPU is the second highest in Europe and would be the highest if it wasn't being artificially depressed by Meteor, most of whose customers use prepaid phones.

And it gets even worse. Ever since it purchased Eircell from Eircom in 2001, Vodafone has had several hundred thousand Irish shareholders. Unfortunately they aren't benefiting from the great mobile phone rip-off. Over the past five years the share price has fallen from stg220p to just stg120p as Vodafone has gone from go-go growth stock to bog-standard utility.