Vodafone suffers in rush for customers

Vodafone, the UK's largest mobile telephone company, shocked the City last night with a profits warning that had analysts paring full-year profit forecasts. The company's shares were among the among the heaviest traded on the stock market yesterday. Volume was estimated at almost 70 million shares.

The profits plunge comes after a costly battle for customers in the mobile phones market. Vodafone has been paying high incentives to dealers to gain customers who have yet to use the phones enough to replenish the company's costs.

Sir Gerald Whent, chief executive of Vodafone, said: "The current growth trend shows no signs of diminishing. The exceptional increase in subscribers in the last months of the financial year will significantly improve next year's profit, but it must be recognised that the corresponding connection commission payments will reduce this year's profits below current market expectations."

In January, Vodafone added 49,000 net new subscribers - almost twice the number of the same period last year. It pays an estimated £250 per customer to the middlemen who sign people up on behalf of the network. This includes an element of bonus and marketing costs but some of the money is passed on to consumers in the form of cheap telephones, often far below the manufacturer's price.

A spokesman for Vodafone said the problem at present is that the company has only two months left of the current financial year to recoup the money. The average business user pays £25 per month plus call charges.

The spokesman said: "These are staggering subscription figures - way beyond expectations, but the short-term costs are there."

One City analyst said that the situation could become worse in future as Vodafone and Cellnet, its main rival, battle for market share. The companies have been attempting to outdo each other in recent months in the level of bonus they pay to win the loyalty of dealers and service providers.

Vodafone is market leader with 1.68 million subscribers, but Cellnet is quickly closing the gap. The companies are also conscious of the newer operators, One-2-One and Orange.

There could be other factors behind the profit warning. Vodafone may be taking on a higher proportion of less-lucrative residential customers than previously, and it has said this will be the peak year for losses linked to start-up projects overseas.

Voddafone has interests in mobile networks in Australia, South Africa and Greece. Start-up losses this year could reach £80m but will then fall off.

Until yesterday, analysts expected Vodafone's pre-tax profit for the year to 31 March to be about £393m, but are now downgrading to about £365m to £370m. Vodafone shares fell by5.5p to 182.5p

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