Ballooning costs associated with the purchase of an expensive 5G spectrum in Europe have pushed up Vodafone’s swelling debt.

On 14 May 2019 telecoms giant Vodafone released preliminary results for the year ending 31 March 2019. Much to the distaste of its shareholders, Vodafone revealed that its full-year dividend had been cut by 40% as the company swung to a EUR 7.6 billion ($8.9 billion) loss for the year. This marks the first dividend cut for the company, which handed EUR 4 billion ($4.7 billion) to its investors last year.

Vodafone earnings 2019

Despite making a profit of EUR 2.8 billion ($3.3 billion) last year, the company has experienced a tough 12 months. Blame has been attributed to the sale of Vodafone India, increased competition in the Italian and Spanish markets and ‘headwinds’ in South Africa.

Additionally, the company’s debt load was worsened by the expensive European 5G spectrum auctions, which Vodafone splurged billions of Euros on.

5G spectrum auctions have been a financial drain

With the commercial launch of 5G fast approaching, telecoms giants are fighting fiercely for a piece of the pie, as they look to enhance their data traffic capabilities. Over the past year the company has spent a combined EUR 4 billion ($4.7 billion) in Germany and Italy, and an additional EUR 198 million ($233 million) and EUR 378 million ($455 million) in Spain and the UK respectively.

As of 2018 Vodafone had operations in over 25 countries and derived about 72.5% of revenues from Europe. Therefore, it is likely that further costs will be incurred upon the purchase of an additional 5G spectrum, which will be necessary to stay competitive.

Vodafone has no choice but to buy into 5G

Wireless telecoms giants such as Vodafone have been cornered into buying into 5G and must pay for these airwaves, despite their high and unpredictable prices. This is particularly true in Europe, where little to no growth in mobile revenues is expected in the coming years.

5G systems are also the cheapest way of expanding network capacity. Data traffic is growing at approximately 40% a year, which is placing pressure on 4G networks. The next generation network offers around seven times the data capacity of its predecessor, which means it is crucial in allowing companies to handle the swelling rates of data consumption.

The technology is seen as the only potential revenue stream which can offset the decline in mobile data prices and is a chance for Vodafone to bring new products and services into the market.

European players such as Vodafone are already behind international rivals. In the US, players such as AT&T and T-Mobile US will start 5G services in dozens of cities in 2019.

Despite the financial strain that 5G development is having on Vodafone, investment is necessary for its long-term growth that should see it reap rewards in the coming years.

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