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Vodafone partners O2- Is UK set for 4G access?

Vodafone and O2 have announced plans to merge their networks into a single grid, to improve coverage and accelerate the move to 4G. However, the deal does not mean customers can expect to roam between the two networks just yet.

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Under an agreement announced on Thursday, Vodafone and O2 parent Telefonica UK will create a joint venture that will take over the running of the pair's basic network infrastructure, including their towers and over 18,500 masts.

However, unlike a similar network sharing agreement between Orange and T-Mobile, customers won't be able to roam between the Vodafone and O2 networks. Vodafone and O2 will keep their customers separate; Telefonica traffic will be carried on Telefonica's network and Vodafone traffic on Vodafone.

The partnership will also help the two firms roll out 4G services more quickly - and up to two years ahead of Ofcom's 2017 cut-off date.

“This partnership is about working smarter as an industry, so that we can focus on what really matters to our customers – delivering a superfast network up to two years faster than Ofcom envisages and to as many people as possible," said Ronan Dunne, CEO of O2. "One physical grid, running independent networks, will mean greater efficiency, fewer site builds, broader coverage and, crucially, investment in innovation and better competition for the customer.”

The move comes as mobile operators battle each other and Ofcom over an upcoming spectrum auction, which would allow the companies to start offering 4G services.

Everything Everywhere - a joint venture between T-Mobile and Orange - has been pushing to use its existing spectrum to offer 4G services ahead of the auction, giving it a head start on its rivals - a plan O2 and Vodafone have both criticised.

O2 complained about Ofcom's spectrum plans, saying the way the auction is arranged would favour other operators over itself and Vodafone.

Once the deal goes through, expected later this year, it should mean improved reception for customers of both operators, according to Vodafone and O2. By sharing infrastructure, the operators claim it will provide indoor 2G and 3G coverage for 98 percent of the UK population by 2015.

O2 and Vodafone claim they will continue to compete for customers and for spectrum in the auction.

However, the partnership means the UK market has gone from five independent mobile firms three years ago to Everything Everywhere, O2 and Vodafone, and Three.

One billion pound savings?

In a briefing with analysts, the CEOs of Vodafone UK and Telefonica UK opted not to disclose any financial expectations from this 50/50 joint venture. Yet, Ovum estimates that a combined savings of over £1 billion across 2G, 3G and 4G is achievable by 2015.

Emeka Obiodu, senior telecoms strategy analyst at Ovum believes both parties can expect to save about 25% of their network costs: “The beauty of the deal is that both Vodafone and Telefonica can look forward to saving at least 25% of their network costs. Considering that Vodafone UK spent £575 million in capex in the year ended March 31 2012, this could lead to savings of over £100 million a year. Over the three years from now until 2015 when both parties expect to achieve 98% indoor population coverage across 2G and 3G, the combined potential savings would be in excess of £600 million.

“By the time both parties roll out LTE, the potential savings would even be higher. The CEOs told us that the network sharing deal at the 2G and 3G level, especially with the installation of single RANs, is laying a solid foundation for further sharing on LTE. If we then assume that it could cost up to £1 billion for each operator to roll out LTE in the UK, combined potential savings for both Vodafone and Telefonica from this deal would be worth in excess of £1 billion by the time they hope to have a 98% LTE coverage in 2015.”

Elsewhere, Obiodu, expects that, ultimately, at least 50% of all LTE rollouts will use shared networks: “While there is no certainty yet about how LTE spectrum will be divvied up in the UK, this deal lays the groundwork for both parties to build out a single LTE network in the country. That means that effectively, the UK is set to become a country with only two physical LTE networks from the Vodafone-Telefonica group and the Orange-T-Mobile-3 group.

"Indeed, we are not surprised at this. Since 2009, Ovum has warned that the financial realities facing mobile telcos means they have no choice but to share their networks. We posited that most countries will end up with not more than two networks. Going forward, we also expect that at least 50% of all LTE network rollouts in the world in the next five years will involve some form of active network sharing.”

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