• Vodafone has struck a 10-year digital services and generative AI partnership with Microsoft
• The companies will team up closely on enterprise service development and delivery 
• Vodafone will invest $1.5bn in co-development work with Microsoft
• The big tech firm will invest in Vodafone’s IoT unit, which will soon be run as a standalone business

Vodafone and Microsoft have struck a deep and far-reaching digital services and generative AI (GenAI) partnership that will tie them together strategically and financially, and see the telco and big tech giant work hand-in-hand across multiple customer sectors and geographies. 

The two giant companies, which have already been working together on specific cloud-related projects, have signed a 10-year deal that Vodafone believes can help it become a leading edge digital service provider (DSP) to its 300 million-plus customer base across Europe and Africa. Vodafone will invest $1.5bn during the coming decade in “cloud and customer-focused AI services developed in conjunction with Microsoft,” while the big tech giant will use Vodafone’s fixed and mobile connectivity services.

“Today, Vodafone has made a bold commitment to the digital future of Europe and Africa,” stated Vodafone Group CEO Margherita Della Valle, who is driving a significant transformation and rationalisation of the telco’s business. “This unique strategic partnership with Microsoft will accelerate the digital transformation of our business customers, particularly small and medium-sized companies, and step up the quality of customer experience for consumers,” she added. 

So there are a lot of positives for Vodafone and its customers here but it will also help Microsoft, of course – Vodafone is one of the world’s largest network operators with a significant customer base with which the big tech giant would love to engage. This is the latest proof point (of many) of the strength of telco and public cloud giant collaboration – they need each other to maximise their digital services potential.  

“This new generation of AI will unlock massive new opportunities for every organisation and every industry around the world,” stated Microsoft chairman and CEO Satya Nadella. “We are delighted that together with Vodafone we will apply the latest cloud and AI technology to enhance the customer experience of hundreds of millions of people and businesses across Africa and Europe, build new products and services, and accelerate the company’s transition to the cloud,” he added.

The Microsoft partnership appears to be the next major step for Vodafone on its transformation journey to become a techco rather than a traditional telco: It has already revamped its application and IT development operations in Europe and is still in the process of hiring additional software developers for its Vodafone Technology team – see Vodafone creates pan-European tech team, plans to add 7,000 software experts by 2025.

And no techco/digital transformation strategy is worth the paper it’s written on these days without AI playing a key role – artificial intelligence applications, and GenAI tools in particular, are regarded as critical to achieving the levels of automation needed in day-to-day business and network operations, as well as in customer relationship interactions, in order for telcos/techcos to remain relevant and viable. In developing a very close, intertwined relationship with Microsoft, Vodafone has jumped into bed with one of the world’s major AI developers, investors (most notably Microsoft’s investment in ChatGPT developer OpenAI) and users.   

So what are Vodafone and Microsoft planning on doing together? There are five main pillars to the new partnership. 

GenAI 

Vodafone’s consumer and enterprise customer experience interactions, including those via the telco’s existing digital assistant TOBi, are going to be underpinned and enhanced with Microsoft’s GenAI platform, Azure OpenAI, to “provide a highly personalised and differentiated customer experience across multiple channels”. TOBI, currently deployed in 13 Vodafone markets, was launched as long ago as 2017 and was initially underpinned by IBM’s Watson platform and software from conversational commerce specialist LivePerson. 

In addition, Vodafone staff will “leverage the AI capabilities of Microsoft Copilot to transform working practices, boost productivity and improve digital efficiency.” That’s a lot of potential Copilot users, as even after Vodafone’s current headcount reduction plan is completed it will still have in the region of 90,000 staff (notwithstanding the impact of any mergers or divestments, of course). 

IoT 

Having stated in mid-2022 that it planned to separate its successful IoT business into an independent operation, Vodafone is about to pull the trigger on that plan, with Microsoft set to invest in the unit that will be created during the next three months. Vodafone currently manages 175 million IoT connections – up from 162.3 million at the close of its most recent full financial year, which ended in March 2023 – and has annual IoT revenues of about €1bn. Vodafone confirmed to TelecomTV that it would be retaining a majority stake in the standalone IoT business, which will not be spun out or listed through an IPO process but which will continue to be consolidated in the Vodafone Group accounts. There is no indication yet of what size of stake MIcrosoft might take once the standalone IoT unit is formed, which will be by April this year, or at what valuation. The rationale behind the IoT separation is to enable the business to have greater autonomy and focus and attract multiple technology and business partners such as Microsoft, which will bring its cloud platform and application developer community to the party.  

Enterprise services

Vodafone already has a large and growing enterprise services division, Vodafone Business, which generates annual service revenues of about €10.3bn and engages with more than 10 million businesses of all sizes around the world, including millions of small- and medium-sized enterprises (SMEs). Vodafone says it will “extend its commitment to distributing Microsoft services, including Microsoft Azure, security solutions and modern work offerings such as Microsoft Teams Phone Mobile, as part of its strategy to become Europe’s leading platform for business,” with a particular focus on providing affordable, cloud-based managed services to Europe’s estimated 24 million SMEs. 

Cloud/datacentre transformation

Vodafone is to “accelerate its cloud transformation by modernising its datacentres on Microsoft Azure” and “replace multiple physical datacentres with virtual ones across Europe,” a move it claims will “improve its responsiveness to customers, while simplifying and reducing the operational costs of its IT estate” as well as cut its energy costs and help Vodafone “deliver against its sustainable business strategy.” 

But this doesn’t mean Vodafone is ditching its other public cloud partners, Amazon Web Services (AWS) and Google Cloud Platform (GCP): The telco tells TelecomTV that its relationships with AWS and GCP remain “as is… Azure gives us a good even spread across the hyperscalers, ensuring a diverse vendor ecosystem.” 

Digital services expansion in Africa 

A significant part of Vodafone’s business is in Africa, where it is present in eight markets via its Vodacom division (including Safaricom), generates more than €7bn in annual revenues and has about 186 million customers. A key service provided by Vodacom is its range of M-Pesa mobile money applications, currently used by about 45 million people. Microsoft will host the M-Pesa platform on the Azure cloud, “enabling the launch of new cloud-native applications,” according to the partners. They will also launch an initiative that “seeks to enrich the lives of 100 million consumers and 1 million SMEs across the African continent. The goal is to enhance digital literacy, skilling and youth outreach programs, as well as offer digital services to the underserved SME market. The partnership aims to boost financial services innovation, building a community of certified developers,” the partners note. 

Robert Curran, consulting analyst at Appledore Research, believes this deal is “as important as the Azure/AT&T deal, certainly for Europe and Africa, albeit somewhat different in scope. It's a clear example of a major telco recalibrating what its core expertise is – and is not – and where it plans to focus for differentiation.”

Curran notes that this is “Vodafone’s second major hyperscaler deal, as it already has a long term deal with Google Cloud,” though that relationship “is more at a technology level, whereas this looks more business-led and structural. It will be interesting to see if, how and where this deal alters things for Vodafone's internal development activity,” adds the analyst.  

The new partnership “also underscores the disruptive expectations for generative AI, which is still at a relatively early stage in telecom. It is already clear that GenAI support for software development is a quick win that accelerates developer productivity. And the early industry focus on using GenAI to improve customer interactions and experience is only the beginning,” adds Curran.   

Ultimately, though, this is about market muscle. “Hyperscalers have that name for a reason: The economies of scale they have been able to create are an order of magnitude greater than what telcos think of as ‘large scale’. GenAI only becomes usable as a technology once you have that kind of scale underpinning it. 

In the end it also indicates how the future of telecom will be shaped by the very largest suppliers – in a software, cloud and AI age” that's less about Nokia, Ericsson or Huawei and more about the “hyperscalers commanding the multi-year, multi-billion dollar deals. This deal looks like a win-win… for Microsoft,” concludes Curran. 

- Ray Le Maistre, Editorial Director, TelecomTV