Good morning and welcome to our Q3 trading update. Margherita and I will be very pleased to take your questions, but what I thought I'd do is just do a very, very short key highlights of the results that we went out with today. First, we delivered a good financial performance, maintaining our strong top-line momentum, growing service revenue at 2.7% and continuing to grow across all of our customer segments. In Europe, we grew at 0.5%, with Germany producing a consistent performance at 1%. Trends across the rest of Europe were pretty consistent. I think what I'd point out is that this was particularly a good performance given this time last year was a stronger trading performance or a tougher comparative, when you take a two-year perspective.
In Africa, trends in South Africa re-accelerated mainly due to business performance and also the reintroduction of some government grants. In business, we saw double-digit performance growth in IoT and cloud and security. Commercially, our European mobile business was good, adding 333,000 net new contract customers in the quarter, which is back at pre-COVID levels. However, our performance in fixed line, and in particular in Germany, has fallen below our expectations. This is a key area of focus for us, and we have a series of initiatives underway to improve that performance. Overall, I would say that our results are in line with our expectations, and we're well on track to deliver the upper end of our financial guidance for FY 2022, which we reiterate today.
Now while this is a Q3 trading update, given the recent speculation surrounding our strategic activity, I felt it's important to put our plans into context. Now, over the past three years, we've been moving at pace around two central things. First of all, simplifying and focusing Vodafone on converged connectivity markets in Europe and Africa through a series of disposals, acquisitions, and combinations. Secondly, to drive more value from our assets, and this included establishing network sharing agreements in each of our European markets, then aggregating the towers together for Vantage Towers, and then the successful EUR 12 billion IPO of Vantage Towers last year. Now, to achieve this, we have been pragmatic and open-minded in our approach to these transactions to improve shareholder returns, and we intend to continue to operate in that way moving forward.
We've had a clear long-term strategy to drive sustainable growth, and we're determined to improve shareholder returns. We outlined three operational priorities and three portfolio priorities. Let me just touch on them. In terms of the operating priorities, we said that we are focused on improving the commercial performance in Germany and clearly in broadband, which is our major focus. In Spain, you saw the announcement of our restructuring in quarter three, and we moved to a fully franchised model within our retail estate and have had a series of initiatives with the government to improve the economics for the sector. In E.U. recovery funds, we very much focused on positioning ourselves as Vodafone Business, which is about 30% of the group, to capture those opportunities. Turning to the strategic portfolio priorities. We've made very good progress in terms of Egypt moving into Vodacom.
It got unanimous approval by the minority shareholders, and we're on track to conclude that by March. In terms of the other two activities, they are primarily what we are doing in terms of further activities around Vantage Towers and moving to a potential industrial merger, continuing to advance those conversations as we are the second one, which is in-market consolidation. Now, clearly, there isn't much we can say about those in-market consolidation activities, but I just want you to know that we are very proactive, we are very pragmatic, and we are getting good engagement from our counterparties to advance this moving forward. Our goal is just to ensure that we have a set of strong assets in healthy markets, delivering strong returns for our shareholders. On that, I will open to Q&A.
Thank you very much. Our first question today comes from David Wright of Bank of America Merrill Lynch. David, please go ahead.
Okay, guys. I hope you can hear me clearly. Not too worried about seeing me. Yeah, so, Nick, I just want to try and extend a little on those final comments, and I appreciate that there's a lot you can't surely say. Just regarding pragmatism, I think one thing you have said is that return on capital regionally is a focus, and you even defined this a couple of years ago, and we've had some momentum. It seems to me that the asset that stands out is Spain. I obviously refer to reports this morning about potential massive deals. We've also had reports of Italy and the U.K. and everything, quite frankly, recently.
Is it fair to say that Spain is the standout asset for you from a return on capital perspective? Also on the whole sort of pragmatism debate, would you be willing, in any of these circumstances, to exit in entirety? Are there any sacred cows, so to speak, in those core European markets where if you got the right offer you would be willing to sell 100%? I should probably leave it there, given everyone else in the queue. Thanks.
Okay. Thank you, David. Look, very important question. Maybe if I could sort of frame up. I think it was one or two years ago, I can't remember the exact presentation, we laid out our portfolio criteria, our framework of how we think about it. I just want to reinforce because it's applicable to every single country that we operate in. The criteria had three elements to it. The first element was, we want to have regional scale, but we have to have local scale. That is important to achieve both. The second thing was, you know, do we see the fact that we have a credible and actionable plan by management to ensure that return on capital is above WACC in the medium term?
Margherita and I invest a lot of time, especially around the February period, going through those reviews to understand on a multi-year basis, what are the levers you are pulling to produce that outcome. These have to be in our control, things we can do on our business, not a wing and a prayer, and we hope that this happens and that happens. What things are in our control to deliver that outcome. Then the third thing that we say is, you know, are we the best owner of this asset? You know, we want to make sure that our group derives value for that asset being part of the group, and that we are delivering value to that asset. So we go through that criteria, and there could be circumstances where a particular market does not meet that criteria.
In those situations, what we said is, we will be very proactive, we will be very pragmatic at finding other alternative solutions. Specifically to your point, other solutions can be JVs. It can be us moving into a majority controlling position on an aggregation. It could be us moving into a minority controlling position on an aggregation, or it could be a disposal. We don't close down options. We evaluate everything with a lens of what's in the best interest of our shareholders.
Okay. Thanks very much, Nick. Thanks, Margherita.
Thank you very much, David. Our next question today comes from Georgios Ierodiaconou from Citigroup. Georgios, please go ahead.
Yes. Good morning, and thank you for taking my question. As you mentioned, Nick, very strong set of results, but we are telco analysts, and we always look at the glass half empty. I wanted to ask a bit about the German broadband performance this quarter. If you don't mind, you mentioned some initiatives. If you don't mind updating us on how you plan to address it. We've seen some announcements on personnel changes. Could you perhaps give us a bit of an indication whether the third quarter is the low point and the recovery will come already from the upcoming quarter? If possible, can you also comment on whether this could also impact the service revenue performance in the coming quarters? Thank you.
Well, Georgios, let me do a tag team with Margherita, so she can handle maybe the latter part of your question. Maybe if it start with the first part. What I'd say is, I called out the fact that improving German operation and commercial performance was one of our top three priorities. If I look at our financial performance in Germany, I think it's a good performance. You saw the half year on the EBITDA, et cetera. I think and consistency of service revenue, and we've seen some improvement in mobile, which is good. You know, the performance in broadband without doubt is below my, our expectation. Why is that? What are the actions we're taking?
I'd say first of all, COVID remains a factor in our performance in Germany, and it's a factor in two respects. You know, still with obviously restrictions over the quarter that we had, retail is still nowhere near pre-COVID levels. I think it's still running at around 50% of the level that it was at pre-COVID. That is a really critical channel for us because, you know, we're the challenger in the market taking share and therefore we need that retail performance to be in place. The second aspect of COVID is just the sheer volume increase on our networks. It has been unprecedented in terms of that volume, and especially on the uplink. We've been doing a series of upgrades to our network, and they will continue.
By summer, we will have uplifted the capacity of the whole network by 60% vs pre-COVID levels, and we will have doubled the capacity on the uplink in the major centers, where we see the highest activity. We are investing hard. This takes time to roll through, but we're very much focused on bringing that capacity up. I would say we had the new telecoms law that went into place, and it had, I would say, two factors for us. The first factor was that essentially it was a big, heavy lift for us in terms of IT changes and in terms of customer journey changes. Frankly, our German team put a very conservative process in place that was very cumbersome. What it did was delayed the transactions with the customer in somewhat of a painful way.
Therefore, what we've said is, "Hold on a minute. We need to stand back." Our competitors did a simpler execution, less conservative than us, let's say, and I think we need to move to that execution. What we're doing is we are now putting in changes through the IT system and the customer journeys, but unfortunately, that will take quarter four to make all of the changes that we want to do. I would say, secondly, this new law essentially said that the recontracting was not automatic on the customer anymore. That has an effect of bringing forward potential churn that we would have seen over the coming quarters. It pulls forward. Now, that pull forward is an industry or let's say sector dynamic, and it would increase churn overall. Yeah, for all players.
The challenge we have is that our retail channel is very important to capture our fair share of the gross adds, and that's what we're not seeing. We're suffering the churn impact, but we're not benefiting from a higher gross add uplift because of the retail constraints. There are a number of things we're doing on the commercial front, actions that are going in place in terms of our plans and portfolio and marketing over the fourth quarter, to improve performance. All I'd say is quarter four is going to be obviously a more challenging quarter 'cause we have a full quarter impact to these things, and then we would expect to see improvement past quarter four. I don't know if you want to
Yes.
Talk on that.
Sure. On the numbers and the KPIs and the financial, we are focused on reaccelerating momentum, but let me go back to what Nick has just said, because I think it's really important. In Q3, we only had a partial impact from the factors which have just been described because the telco law only came into effect on the first of December. As we get into Q4, we will have a full quarter of impacts, and this will be both on fixed and on mobile. Now, beyond Q4, we will then start to see a gradual improvement because you will have the mechanical effects that Nick was describing in terms of more volumes in the market that will unwind gradually, and then, of course, our actions as well that will come into effect. That's important for volumes.
From a revenue perspective, I need to say very pleased to see the consistent revenue generation that we are having in Germany, another quarter at 1% growth, with also an acceleration in mobile. If I think about the coming quarters into FY 2023 for Germany, clearly we will have an impact from the fact that fixed broadband volumes have been lighter. It's not all about volumes. These tend to be relatively small movements. It's also important to remind that we are having a good dynamic on ARPU. On fixed, you will have seen this quarter around 2% growth on the whole of the base. Beyond fixed, you have mobile. You have seen a stronger quarter on volumes in mobile. Actually, probably a bit stronger than what it looks like.
You have read 70K net adds in contract in this quarter. In reality, we have also disconnected some zero traffic SIM from the old Unitymedia and VNO. The real underlying performance is closer to 120K. That's supportive. Finally, we will have, of course, Vodafone Business, good performance this quarter. Strong demand, particularly, I would say, in Germany at the moment from the public sector, where we are also seeing some early wins on the European recovery fund side. Stepping back, Germany, a good market for us, but not just on service revenue, net of all this, but also, as you know, from an EBITDA perspective, we are continuing to outperform on the synergy delivery, good operational leverage also going forward.
Thank you. Okay.
Thank you very much. Our next question today comes from Akhil Dattani from JP Morgan. Akhil, please go ahead.
Hi. Morning, Nick. Morning, Margherita. Thanks for taking the question. I just wanted to ask a question on the broader operational outlook, in terms of the revenue trends going forward. Three small parts to it, if I may. I mean, the first is if you could just give us some color on the puts and takes for Q4 and beyond, just so we understand how you're thinking about revenues. The second is it's obviously great to see that all the U.K. telcos seem to be pushing through pricing. You've obviously talked about beyond the U.K. If we could get an update on that. The third thing, I guess it's kind of linked to the U.K. piece, is that there's a lot of debates in the market at the moment around real vs nominal growth, given where inflation is.
Given your guidance of growth in Europe, I'm sure you have ambitions for growth to continue improving, but could you just give us some thoughts around that real vs nominal, question that Investors are putting to us? Thanks a lot.
Margherita?
Sure. I'll take the three in turn. Starting with near-term service revenue performance into Q4, I would say see it as very small puts and takes in the near term. If I look at the markets, I would say in Europe you will have Spain, which will have a new MTR reduction and also will lap the price increases that we did in November last year for the first time for a full quarter. That will be a drag. On the other end, you are seeing the U.K. results continuing to accelerate with very strong commercial momentum, so that would be supportive. Beyond Europe, in South Africa, we are lapping a peak quarter. Last year in terms of service revenue growth, you had the COVID measures and then you had the Cell C roaming.
A little bit of puts and takes in the near term into Q4, but nothing particularly significant overall. As maybe you are asking about CPI plus pricing mechanism and how all this is going to play into next year. Trying to summarize on the pricing mechanism, we're pleased with the progress. We have embedded into our contracts in five markets now the CPI plus mechanism. As we get into calendar 2022, clearly the time has come to activate the mechanism. We will see two markets within these five that are going to go live first, U.K. and Ireland, and then you should expect more to follow. These pricing dynamics are expected to support service revenue into FY 2023.
Maybe more broadly, you are asking what sort of real growth we will have in FY 2023. Again, a few puts and takes. We are sitting down to do our target setting now in the coming weeks. If I can share the outlook elements of growth in Europe into next year, particularly. I'd say if I can get out of the way once again what is a little bit technical, we will continue to have roaming tailwinds offsetting MTR headwinds exactly like this year. We will then have, of course, the lapping of the MVNO revenues in Italy, starting from Q2. Another, I would say, more technical drag. From a business perspective, we will have the support of the pricing actions we have just described.
We will see the fact that commercial momentum this year was affected by COVID, the discussion we've had just now in Germany on fixed, but equally recovery in mobile. Then the final element, which I think is really important for next year, is the European recovery funds. This will start impact revenues materially now, and we are very pleased with the progress, particularly Italy, Spain, but early signs also in Germany. I hope we will have a chance to explain this in a little bit more detail later. Net of all these puts and takes, technical and non-technical, I really see us as well set to continue to deliver sustainable growth in Europe and Africa into FY 2023.
Great. Thanks a lot.
Thank you very much, Akhil. Our next question today comes from Maurice Patrick from Barclays. Maurice, please go ahead.
Hi there, guys. Yeah, hopefully you can hear me fine. If I can use the mute, the unmute function. Maybe a question on consolidation related to feedback you've had from the various stakeholders. When you made the pitch in November, Nick, around the need for consolidation, you know, you talked about it. It seemed as though you were raising that agenda with more than just us in the audience of investors and analysts. I'm sure you had a chance to float your views with people like the EC and Margrethe Vestager et al. Just curious as to how those conversations have gone, what kind of feedback you've had.
If you think there's a chance we might see some sort of positive noises ahead of the result of the EC appeal, which I think is due this summer around the Hutchison merger. Like latest thoughts in terms of the feedback you've had on your conversations around potential M&A.
Yeah. What I would say is, you know, though we talked about it in November, this has really been a conversation that's been building, I'd say, over the COVID period, so over the two-year period. Because that's when the conversation has really changed in terms of the dynamic. You know, we, I think, did a very professional response to COVID with our five-point plan that was recognized by governments. They started to proactively engage at a different level than we have ever experienced before. I think I'd said previously, I'd had multiple calls with governments in terms of our response, how we could support, and what they needed to do. And I think it opened up a different stream of discussion, and the different stream was they wanted more critical national infrastructure, next generation connectivity expanded as fast as possible. What could they do to help facilitate that?
That gave us an opportunity to talk about the low returns in the sector, and if they want to attract investment, we have to improve the returns to an acceptable level. I went through those arguments about the fact that we are a highly fragmented sector across Europe, over 100 players, U.S. three, China three, all the arguments you've heard before. What it did was it allowed us to have a little bit of a framework of policies that we've engaged in, I would say, for the last two years. It was around spectrum, and I think you've seen a number of good progress on spectrum.
Frankly, all of the auctions, if I put Spain, Portugal to one side, have been good outcomes, whether it's Spain, Greece, U.K., in terms of just lowering the cost and understanding we need a certain size of spectrum, and Spain going to that unprecedented level of doubling the duration to 40. We also talked about specific taxes to the sector. Spain again responded by lowering taxation on the sector. The third was, how do you focus the EU recovery funds on the goal of accelerating digitalization in Europe? How do we stay competitive globally? We really influenced the focus to be on SMEs because SMEs in Europe are way down in their level of digitization on their business model vs others. The second was health, 'cause the health industry needs to be modernized and digitized, and then public sector transformation.
We've been very targeted, very thoughtful about those engagements. Within that, the final one was consolidation. My argument is, this is nothing to do with competition pricing. It's to do with we need industrial scale locally on top of our regional local scale. If we don't have that, we don't earn acceptable returns. The case has to be by country, and I think that has really resonated with every member state politician that I've engaged with. They understand the logic. They look at marketplaces. Let me pick U.K., Spain, Italy, and I would argue now Portugal that's now added two new entrants when they really meant to add one, as examples where you've got four MNOs and very big scaled MVNOs.
It's already hypercompetitive, and all we're talking about is going from four infrastructures down to three infrastructures to have the right economics to earn a return at the pricing levels you see in a number of the markets. I what I would say is I think that the argument is not about do we not want competition. We want competition. We are the challenger against the incumbents. We're pro-competition, but what we're saying is please balance a new balance of competition vs encouraging investment going forward. I think that is a very positive narrative for politicians and for Brussels. Of course, it will always come down to the fact pattern being presented for that country. What I'd say is I think the countries will lean into the agenda and the sector is leaning into that agenda.
Therefore, I think it's not about we need rule changes. This is not about rule changes. Commissioner Vestager has already said that she has enough flexibility depending on the situation of a market, and I think that there's a new reality now within the marketplace, a new economic context that allows a different judgment moving forward.
Thank you. Very clear.
Thank you very much, Maurice. Our next question today comes from Andrew Lee from Goldman Sachs. Andrew, please go ahead.
Yeah. Morning, guys. Thanks for the comprehensive answer on consolidation as far as you can go right now. Just had a couple of questions on two other kind of changing events that are going on in terms of operations. Margherita, you hinted at the European Recovery Fund, and maybe you could give us a bit more detail about firstly the timing and the impact of those recovery funds. It's quite hard for us to get a sense of the materiality there. And then just secondly on the cost side, I know this is a revenue reporting quarter, but across your peers, we've seen quite a few delayed cost efficiencies and some misses on OpEx guidance over the past couple of days.
Wonder if you could just give us an update on how your cost controls are going given cost inflation. Has anything changed in terms of the scope for cost efficiencies in the longer term from your perspective? Thank you.
European Recovery Fund first. We've really worked a lot
I would say on this, both in terms of, as you know, investing in our digital services offer to make the most of the opportunity, as well as working with the governments across Europe to ensure that digitization of businesses was a key part of the agenda. I need to say it's good to see now two major programs kicked off in two of our biggest markets. We have Italy and Spain now going live in these weeks. Let me just describe those two programs. In Spain, first, EUR 3 billion have been allocated to SME digitization, and of these, half a billion for the companies between 10 and 49 employees are going live effectively now. These will be subsidizing digital toolkits for these companies, and the money will be effectively spent over the coming year.
More tranches, so GBP half a billion now, more tranches for the full GBP 3 billion will be distributed in the coming year and beyond. In terms of how this impacts us and our revenue performance in Spain, we will be a key aggregator of digital services, so we will have toolkits at the ready for our customers to effectively subscribe through the website on this model. We are not going to be the only players. There will be other telcos and also other players outside telcos. Because of how we are positioned in terms of our market in business in Spain, 1/3 of our revenues are business in Spain as well as in Italy, and we have really strong assets. We are gaining share.
We think that also, in terms of these allowances, we will have a good share in our numbers going forward. Italy, this probably in terms of P&L will start flowing more in terms of our own results around the summer. The program that is kicked off now is also for SMEs, but it's focused on connectivity vouchers, so pure connectivity, not broader digital. GBP 600 million, again, being distributed over two years in this case, and again, well-positioned for the fund to get advantage of that. Finally, we start to see Germany moving on a different level. We're not talking vouchers there. We are talking about public sector tenders on 5G, digital services and the like, in which we are also starting to see some wins for Vodafone.
I think you should expect this to be material into FY 2023 for us, and it again plays to our strength and the investment we have made in business.
Sorry, just before you go on to the second, Jo, I think one build I would say is that being really the only genuine Pan-European player, a lot of the governments are asking us, what are other countries doing? What's best practice? What's accelerating?
Mm.
The mechanisms of how they do these schemes, we are really facilitating a lot across the countries. We love the scheme in Spain. Look, I frankly give Spanish government full credit for how they are executing this, because the mechanism is really good to get the funds to SMEs quickly on the services, and that's something that we are keen to replicate in a number of other markets, and we're seeing traction on that. Again, it's another reason to have a slightly higher dialogue with the various policymakers. Sorry.
Inflation and OpEx, moving from revenues to cost. I think it's a really good point that you're raising here, because we are seeing, as everyone else in the industry and beyond, inflationary pressure building into next year, which are stronger than what we would have seen in a normal year. Probably to bring this to life, I'd say the key examples for Vodafone would be on one end, employment costs. It's 15% of our service revenue, and clearly we are seeing pressures for increases there. Then the second aspect, as everyone else, is energy. To actually give you a sense of scale, if energy prices were to remain where they are today, just for Europe in Vodafone next year, we are talking about a cost increase of GBP 150 million.
This is with most of the year being edged. We are talking about an impact which is part of the second half of the year. It is material. As you know, we are starting from a really strong position on cost management. We have talked in November about Vodafone continuing to progress in efficiencies, top quartile, moving to the top of the top quartile. We are in a good position there, and we also are really working hard to push further our key cost efficiency levers, which are always the same one. Essentially, as you know very well, we are leveraging our scale to drive shared service operations and then digitize these operations at speed.
The big driver of further efficiencies coming into next year is going to be the transformation we have just done this year in technology. You know, we have integrated all our European teams in technology, and therefore, we can expect an acceleration of efficiencies from that. Equally, it's going to be a more challenging year than usual in terms of the pressure and the headwinds from inflation against that. Now
We are sitting down in the coming weeks to actually plan, as I was saying earlier, next year. What I can tell you today is that, first of all, we are well on course for the remainder of the year. You remember we have to deliver another GBP 200 million net OpEx reduction in FY 2022, fully on track to deliver this. It will position us as having cut net to the bottom line over 16% of European OpEx. Quite a result and of course, supporting us confirming that we will close EBITDA in line with our own guidance at the upper end of our original target range. Beyond this year, we will do the final numbers in the coming week and of course, update you in May.
What I can see, I can say now is that we continue to see ourselves well positioned to deliver the continued step up that we have put in our midterm ambition in terms of continuously growing return. The precise element of that we will share in May as part of our guidance.
Thank you.
Thank you very much, Andrew. Our next question today comes from Jerry Dellis from Jefferies. Jerry, please go ahead.
Yes. Good morning. Thank you very much for taking my question. I had a question related to Germany, please. You mentioned three months ago the possibility of investing in fiber to housing associations, and that could be a useful mechanism for maintaining the collective contract arrangement into the medium term. I'd just be interested in your sort of thoughts on that, now that you're sort of armed with some early insights of the impact of the sort of German telecom law in other areas. And you mentioned that one of the issues that you've been sort of feeling in broadband this quarter is related to the IT systems, and there have been some glitches, as it seems to me, in terms of customer retention.
I don't quite understand what it is about your IT systems that have sort of created these challenges. I'd just be grateful if you could explain that briefly, please. Thank you.
Yeah. Jerry, maybe I'll start with the latter and then talk to the former. It's very simple. When I say that our team did a conservative process, it was a painful process for the customer, and it requires customer confirmation. We were requiring the customer to confirm back in an email to us. That is a painful process because you imagine we've gone through the whole call, we've had the transaction, and then we send them a link to then confirm back to us. I mean, it's too many steps, whereas others have done things like record the conversation, send the file as confirmation. There's many other ways that you could be less conservative in your application of the customer confirming back to us. That was one part. Then the second part was, I'd say our IT systems.
The execution itself was not as, let's say, stable as we would have liked, and therefore we had challenges. I'd say we are improving the customer journey, but improving the customer journey, you have to then rewrite the IT code for the journey, and that is, you know, in the big systems of telcos, that takes time. Look, it was our management. I am sure the other competitors will not mention it, and I'm saying it's our execution. We understand the issue, and we are rewriting the code, we are rewriting the journeys. We know what we need to do. The team are on it, but it just takes a bit of time through Q4. I'd say on the former question, if I understood it correctly, you know, I commented about the fact that we are engaging with housing associations.
At the time of November, around about our engagement was just under 50% of the housing associations. You know, clearly we've had the festive period, you know, COVID, various other things. I wouldn't say it's overly advanced to now, but by March, the end of March, we are aiming to have contacted 2/3 of the housing association. I think we can give a lot more color when we get to May. It still is really into three buckets, which is, first of all, the housing associations that could be interested in having fiber accelerated to their building but are not interested in changing the wiring in the building until they do a refurbishment, and that is normally a five- to ten-year cycle.
There's another group of customers that are saying, "Just tell us about the upgrade of your cable network because we don't want disruption either in the building or outside the building." The third are saying, you know, "Look, this isn't even on our radar. It's not something that's important." When we understand that, to the first bucket, that is the first bucket where we say, "Okay, if it's sizable enough, we may then say, we do want to accelerate fiber to the building in some zones, areas, et cetera." If it was sizable enough, all we were pointing out was there's plenty of infra funds sitting out there that would love to co-invest. In that model, we would do it off balance sheet.
Got it. Very clear. Thank you.
Thank you very much, Jerry. Our next question today comes from Carl Murdock-Smith from Berenberg. Carl, please go ahead.
Morning, guys, and thanks for the question. I just wanted to kind of ask on the CPI plus dynamic. Can you remind us which the other three countries are where you've embedded CPI plus dynamics? Then kind of as we move forward in the next few months, one of the very interesting things, I suppose, is how much of these price increases will stick vs how much will have to be reinvested into retention and acquisition. I was just wondering if you could talk a bit to that in terms of your assumptions and also kind of have you seen anything in the markets as yet? Obviously, we've started getting the communications happening of these increases happening in the U.K. Are you seeing any changes to the kind of special offers in the market? Thank you.
Yeah. Well, Carl, maybe I'll just touch on the U.K. because it's sort of like a live example being executed now and then.
Yep.
Maybe Margherita touch on those. Just in terms of the U.K., you know, clearly, BT, EE, Virgin, Three have all communicated already to the customer. So those communications have gone out. Our communication is planned for March, so that's when we'll be engaging with customers. No change in our plans in terms of execution. Clearly, when you think about the—you're really alluding to what we call the frontbook-backbook dynamic here. So you're repricing the backbook that sits on our base, and therefore, what could undermine is potentially frontbook promos. What I would say is just bear in mind that let's pick the U.K. as an example.
You know, 1/3 of that commercial activity that we do in any given month, only 1/3 of it is actually new customers coming into Vodafone, and actually 2/3 of it is us just doing renewals on the base. So that renewals process has that formula within it, okay? Then on the third, yes, it could be susceptible to promos. We have to see how the market develops. What I would say is we're coming out of, you know, Black Friday. We're coming out of January promos. We are seeing in a number of competitors throughout the U.K. price increases of the frontbook because of the actions that are taken on the backbook. So what I'm saying is, it is a market dynamic. You have to move frontbook pricing sort of in line with your backbook, depending on where you are, if they're in parity or whatever.
I think operators are well aware of that. We'll have to see how it evolves. It's not something we control. It's a market dynamic.
Mm.
Obviously, you know, we want a healthy marketplace, and we need to improve returns. I think that's why the U.K. market, the players put through the changes, and we'll see how it evolves.
Yes. In terms of perimeter across Europe, at the moment, we have live U.K., Ireland, Portugal, Hungary, and Albania. We cannot comment on specific market, but we have another major market which we are working on with a mechanism which will be a bit broader than CPI plus, but with always in mind the same, I would say, logic, which we think is the necessary logic for the industry, as we see the need to invest more, and also, as we discussed earlier with Georgios, the fact that our own cost base is increasing.
In terms of how this will feed into the service revenue trends into FY 2023, back to what we were discussing earlier, we will continue to have on pricing the traditional pressures that we have seen also this year, particularly in Southern Europe, in terms of heightened competitiveness in consumer, particularly at the low end. We don't expect this to change and you know where the various markets stand. These movements will give us a chance to start working in the other direction, again, something the industry really needs. The activations, U.K., Ireland, going live in April. As far as the others are concerned, it's again also a market consideration, so it's difficult for us today to sort of tell you a precise schedule. Definitely right approach for the industry that we are leading.
Yeah. Just final build on Margherita's point. You know, it may be that the incumbent chooses not to do a CPI plus type model and do some other form of price increase.
Mm.
In a different way. If that's the case, fine. It's going in a healthy direction. That's all we care about is how do we improve and produce sustainable returns and a healthy sector.
That's great. Thank you very much.
Thank you very much, Carl. Our next question today comes from Robert Grindle from Deutsche Bank. Robert, please go ahead.
Good morning. Thank you. Something interesting is going on in your mobile data traffic growth, which has been easing post the early pandemic but slowed more materially in Q3. Absolute petabytes declined sequentially in Europe. Are we just seeing less working from home here? MSR growth is accelerating, so prices must be improving faster than volumes slowing, so that should help capital intensity. Are you seeing less congestion in the network, or less pressure on volume-related CapEx, leaving more headroom for new services? Sticking with the mobile network, I see that Johan and team are getting into Open RAN chip.
Architecture design. Is that something beyond specification and testing, or is it just about improving the ecosystem for Open RAN? Thanks.
Why don't I take the latter and you take the former?
Yes. Many questions. If I start on the traffic trends, absolutely true. We have seen a moderation of the traffic growth, actually, in mobile as well as in fixed. I think you should step maybe away from the sort of quarter-on-quarter elements that includes a degree of seasonality. I would say the best way for me to look at it is post-COVID, the compound of the last two years' growth rates. If you look at it in this way, accumulating Q3 this year and Q3 last year, you would see that traffic, at least for us, in Europe, in mobile, has increased about 80%. It still is a run rate of 40% on average per year-on-year, so not very different from the run rate we were having before.
If you just look and similar reasoning for fixed, which has been up 70% over the two years accumulated in Europe. If you look just at this particular quarter then, you have certain dynamics in terms of how the various COVID lockdowns and other restrictions played. In particular, just on Q3 vs last year, it's a real slowdown because last year we had peaks in variable usage driven by the Christmas lockdowns of 2020 that impacted traffic. All in all, I would say also linking into your sort of CapEx potential implication, I don't see a major movement there.
Just on Open RAN, I think it's fair to say that, you know, we really believe in Open RAN. We have been doing a lot of front running on the thinking of Open RAN. What we're trying to do is drive a bigger and bigger ecosystem around Open RAN. We think that this is important for diversity, resilience of networks moving forward. If we're gonna have fewer and fewer vendors, we need to find another route to create sort of more diversity. I think we're making very good progress. You know that we signed an MoU with the other major European players in terms of development of Open RAN, the standards the vendors were engaging with. I had a meeting with a number of them, was it last week or the week before?
This was a topic on the agenda in terms of the next steps of what we were doing, and actually we were seeing a demo of Open RAN and making sure that we had full interoperability between the components and the operators. In other words, like a shared RAN execution. I'm very pleased with how it's progressing. We've also just opened in Málaga this Monday a new R&D center that is 600 software engineers and specialist salespeople. Within that, there's 50 people dedicated to Open RAN development. That's where we are centering. We're also gonna do one in Dresden as well. We are trying to provide places where new vendors, new software providers can come and engage with the industry effectively on Open RAN.
We've just done the first ever commercial launch in the U.K. The first site is in Bath, just in case you wanna go there for lunch. Yeah. This is part of the first commercial launch in Europe of 2,500 sites. I would say we're pushing ahead very actively. We're trialing interoperability in Germany and Ireland, and we're also trialing down in Africa as well.
Okay. Thank you very much, Robert.
What I would like to see.
Oh, sorry.
What I would like to see, more European players. At the moment, it's all the U.S. people involved in Open RAN. What I was encouraging with my counterparts and in Brussels and member states is we need to develop a European ecosystem. It goes back to my point about we have an opportunity in the Digital Decade of resetting what Europe can produce, and I'm very passionate at trying to create that alternative ecosystem as well. That's a long one-hour presentation for another day.
Okay. Thank you very much. We have time for one more question today, and that's coming from Jakob Bluestone from Credit Suisse. Jakob, please go ahead.
Great. Thanks for fitting me in. It's on consolidation, so it may be a very short answer, in which case we should be fine in terms of time. I just wanted to follow up on what you were saying in response to Morris's question earlier, around the engagement with particularly antitrust authorities as opposed to just with sort of or with broader authorities. I mean, you've talked about how policymakers understand the importance of end market consolidation, but just listening to some of the more recent comments from Vestager in particular, you know, she's still saying that competition drives investment, not consolidation driving investment.
You know, we've seen in the U.K., with the sort of reaction from the CMA to the Cellnex Hutchison deal that I think it's fair to say it's not a walk in the park, getting a deal over the line. Could you maybe comment on, you know, specifically with antitrust authorities, are you still confident that they too have shifted their sort of draconian stance, or is it just sort of politicians more broadly? You know, if some of these various reported transactions do sort of get to that stage, do you think we'll see a different model of remedies from what we've seen in the past? Thank you.
Yeah. Let me try and give some color. I mean, you know, I saw Commissioner Vestager's comments yesterday. My view is she is saying competition is healthy. I don't disagree. I'm violently agreeing. I'm pro-competition. We need competition. There's a difference between competition and hyper competition that damages and constrains inward investment into what is critical for Europe to achieve its digital decade objectives. What she also was saying was that there's not a magic number. You know, it doesn't need to be four, five, six. There is no magic number. In the U.S., there's three. In China, there's three. As I say, there's over 100 in Europe. I don't think 100 is the magic number for sure, yeah. You can decide whether three is.
What I'm saying is that I think there's a reconsideration going on of rebalancing. I want competition, but I do want investment. The I want investment was never part of the conversation before. I would say that they are actively balanced now. I think there's a new balance, and there's a new economic reality of where we are post COVID and pandemic, and the desire to stay globally competitive. There is a lot of political pressure to say we need investment, we need this infrastructure to be competitive. It is a highly competitive sector already, and therefore, having industrial scale is a valid argument. To me, when you talk about, well, what are the arguments? It's not pricing. I hate the word market repair. It's not ever used by me.
I'm talking about industrial scale to get the economies right, to make the investments but still earn a return. That's the central argument. I would say from my engagement with the commissioner, she says, "I hear your argument. Of course, I will need to see the individual facts of a market, but your argument is not invalid, if you like. I can see the points you are registering." What I would say is, don't see the world today as what the world was like back in 2016. It has moved on. 5G is a new cycle with a completely different economic basis, and therefore it requires a different fact pattern and different consideration. I think that's resonating. Just on your point of CMA, I've not personally engaged with them directly.
I think the comment they were really making about the Cellnex transaction is they were worried about a duopoly. Yeah, I worry about duopolies, and I worry about monopolies. Yeah, I agree. Okay? But we're not even remotely close to that scenario in any market in mobile across Europe. So to me, that's a bit of an irrelevance to the debate.
Thank you. That's very helpful.
As you can tell, I have strong views, though.
Clearly.
Okay. Well, look.
We all do.
On that, look, I'd like to say a personal thank you for taking the time and energy to spend with us. Look, I'm pleased with our Q3 results. We continue to have service revenue momentum. We've got three very clear operational priorities. We've got three very clear portfolio priorities. We are active, engaged, pragmatic to deliver shareholder value, and I look forward to updating you. We look forward to updating you on further progress moving forward. Take care.