Vodafone signs 'milestone' network tie-up with O2

Vodafone has signed a landmark deal with O2's parent company which could save them "hundreds of millions of pounds," as the two rivals attempt to combat the disintegrating economic conditions. The shift prompted analysts to predict a spate of similar deals throughout the industry.

Vodafone and the Spanish giant Telefónica yesterday announced a plan to share network infrastructure in the UK as well as Germany, Spain and the Republic of Ireland, the largest deal of its size. Michel Combes, the chief executive of Vodafone in Europe, said the announcement marked "a transformational deal for the industry, in terms of size and scope".

Telefónica Europe's head, Matthew Key, said: "It reflects a mindset change in the industry," before adding that the "current economic situation was one catalyst" for the deal. He said: "These are two of the leading players coming together from a position of strength, but we will continue to compete aggressively in the retail space."

In the UK, the two companies will build and share new network sites together. They will share the masts, antennas, cabinets and power supply, as well as consolidate their existing G and 3G masts.

Terry Norman, a senior analyst at Analysys Mason, said: "Equipment costs and maintenance are very expensive. The two companies are being brave. It is a sign of the way the industry is going and I think others will follow."

The plan is expected to deliver "cost efficiencies of hundreds of millions of pounds for each company over 10 years," according to the companies. No job losses are expected from the tie-up.

The groups hope to provide customers with wider network coverage, using fewer masts. They hope that voice services will improve as well as providing services such as mobile broadband to more customers in a wider area of the country.

Chris Williams, the telecoms partner at Deloitte, said: "It provides considerable potential for cost saving. The scope of this deal is impressive and is likely to herald further tie-ups across the sector. The key issue is competition – essentially we are moving to service rather than infrastructure-based competition."

Mr Combes said the concept of network sharing had been a "key part of Vodafone's strategy". It has not, however, been such a key strategy for O2, and Mr Key was forced to defend the company's U-turn yesterday. "We have said in the past that we were sceptical of network sharing that would detrimentally impact the customer. This deal does not do that," he said.

The mobile phone operators have been relatively resilient in the face of the global downturn. Vodafone's focus has shifted from expansion under its former chief executive Arun Sarin, to cost-cutting under his replacement, Vittorio Colao, who joined last July. He announced plans to slash costs by £1bn by 2011, and it emerged last month that 500 workers would be axed in the UK.

The handset makers are suffering worse. Last week Sony Ericsson warned of losses in the first quarter as consumer demand for handsets has slumped in the past six months, while Nokia announced plans to cut 1,700 jobs worldwide.