Mobile phone defies recession: Limited competition and a surge in demand has helped two companies make big profits. Mary Fagan and Terry Wilkinson report

THE ECONOMIC gloom has done little to dent the growing popularity of mobile telephones, as the soaring profits of the cellular telephone companies, Vodafone and Cellnet, show.

Vodafone has just announced taxable profits of pounds 322m for last year, more than 19 per cent up on the previous year.

The high returns owe much to the Government's decision in 1982 to license only two mobile phone operators. Demand has been much greater than predicted.

Mobile phone rental and call charges are not regulated - unlike prices charged by BT, which are controlled by Oftel, the industry watchdog. The Government chose instead to introduce new competition, but has had limited success.

Although four licences were given to operators of Telepoint, a cheap alternative to mobile phones, only one, Rabbit, has survived and only on a small scale.

This absence of competition and an explosion in demand has allowed Vodafone and Cellnet to enjoy high profitability.

Only five years ago, Vodafone made a small loss of pounds 3.8m on sales of pounds 67.9m. The pounds 322m profits announced this week on sales of pounds 664m imply profit margins of almost 50 per cent. Cellnet is not far behind at just under 40 per cent. Potential competitors have been put off by the cost of building a mobile phone network, which requires large numbers of linked base stations around the country.

Vodafone spent pounds 550m on its basic network, money it has long since recovered, and is spending pounds 100m on a system employing digital technology. Since Vodafone and Cellnet will probably still enjoy a big share of a much expanded market for mobile phones, it is unlikely that profit margins will fall significantly. Analysts at the City firm Barclays de Zoete Wedd are forecasting that Vodafone will have profit margins in the low to mid-forties by 2000.

So far, Vodafone and Cellnet have had little to offer the average consumer - high call charges have made mobile telephones a luxury for businesses and the wealthy. But Vodafone and Cellnet will face competition this summer from a mobile service called Mercury One-2-One, a joint venture between Cable & Wireless and an American company, US West.

Next year, Hutchison of Hong Kong will enter the market and the estimates are that up to 8 million people in Britain will be using mobile telephones by the end of the decade, compared with about 1,500 today. The new services will be cheaper than existing cellular radio - Mercury One-2-One is expected to offer prices up to 40 per cent lower than Vodafone and Cellnet. The expected rates are call charges of about 8p a minute or 16p for peak time, which compares with standard cellular charges of up to 33p peak and 10p off-peak.

The two companies have responded to attacks on their duopoly with lower charges for people who use their mobiles infrequently and, later this year, Vodafone plans its cheapest offering yet which, it hopes, will be the beginning of the mass- market mobile phone.

The LowCall service launched by Vodafone last October has higher call charges than the ordinary service but a lower monthly subscription - pounds 15 compared with pounds 25.

It benefits those who make at most one two-minute call at peak rates every day but is still primarily for the business user. Cellnet has a similar low-user scheme, but again this is not a true consumer offering.

One-2-One will also have a low-user scheme with call charges between 10p and 25p and a monthly charge of pounds 12.50. Vodafone will meet that challenge in the next few months with a new digital service.

The drawback of Vodafone's planned low-cost offering is that it is limited geographically - calls may be cheap, but if you move outside your town or city to make the call, you will pay much more.

Meanwhile, those attracted to Mercury One-2-One may have to wait until the end of the decade for national coverage. The service starts in the M25 area although the company plans to cover almost a quarter of the population - again in an area centred on London - by April next year.

In spite of the scramble for the pockets of the consumer, no one really knows whether the average Briton really wants or needs a mobile telephone.