Tuesday, April 15, 2014

Ziggo: preview 13Q1

Ziggo reports on 13Q1 tomorrow, April 16, at 7:30 AM local time.

Relevancy to investors is limited, since the Liberty Global share price drives Ziggo's stock. Apart from the performance relative to consensus and the outlook (can it be maintained?), this is what to look for on the consumer market:
  • Analog TV losses and conversion to digital. Analog penetration will drop below 15%, bringing analog switch-off discussions into the spotlight. It's the last quarter including subscribers on the Kabelnoord network.
  • Network utility rate: dropping to just over 60%.
  • Broadband market: net additions, penetration to cross the 70% mark.
  • Mobile market: not quite reaching 100k (YE 2013: 33k).
  • Organic revenue growth (excl. the Esprit takeover): further improvement expected in line with management goals coming from broadband and telephony.
  • EBITDA margin: may drop after heavy ad spending, but management target is flat for the year.
  • Capex: guidance EUR 370 for the year.
When it comes to the business market, it remains to be seen if there is any growth at all. Excluding Esprit, revenues have been flat for a while.

Further operational details:
  • How is the WiFi network developing. How many homespots? Are public hotspots being added? Usage stats.
  • Usage stats on Ziggo's apps (TV app, voicemail app and the new Bapp VoIP app).
  • Netflix impact, both on traffic and revenues.
  • Other subscriber numbers, such as HBO subs and digital pay-TV subs.
  • Commercial plans, campaigns.

Wednesday, March 19, 2014

Social networks and privacy issues

There have been issues around privacy, in some cases involving social networks:
The questions are: what is privacy, what is a social network and how do they relate?

What is privacy?
  • When personal details are visible to unwanted persons; when a link between details and a person is visible.
  • Personal details in levels: the person, personal identifiers (name, (email) address), aliasses (username, avatar, bank account no, passport no, social security no, member no, registration no), expressions (likes, clicks, cookies, location, availability).
Privacy concerns are about:
  • Social networking: what do we share?
  • Technology: are the data selected & distributed by computers/algoritms alone, or also by editors & sales persons?
  • Advertising: free services cost money and are funded by ads; but are the ads/funds a means to an end (Google: solve all the world's problems with software/hardware), or a goal in itself to maximise profit/cashflow/value (Facebook)?
Why is privacy an issue?
  • Spam, targeted ads, recommendations.
  • Fraud, theft.
  • Stalking, assault, (child) abuse.
  • Information shared with unwanted people (employer, tax office, competitor, enemy, etc.)
  • Information shared among social networks when they cooperate or merge.
There is a low entry barrier to build a social network, but it's difficult to reach scale, build an audience and get the network effect to work for you.

What is a social network?
  1. A service you sign up to.
  2. A service you contribute to.
  3. Allows for sharing (i.e. bank account holders and utility/telco/cableco subs don't count as a social network).
1. How does one sign up?
  • Name
  • Alias
2. What can one contribute?
  • Communication:
    • streaming audio: voice call
    • streaming audio + video: video call
    • text: chat/IM, SMS, email
    • attachment: emoticon, sticker; photo; audioclip; videoclip; doc
    • metadata: tags; url, link; like; location; availability
  • Entertainment/media:
    • print/text
    • music
    • pictures
    • videos
    • games
3. Is one allowed to share?
  • In communication, this is implicit.
  • In media, piracy issues are introduced.
Social networks morph:
  • Google buys Pyra Labs (Blogger); Google buys YouTube; YouTube (UGC) adds professional content; Google buys Waze; Google adds VoIP to Hangouts
  • Facebook: adds Messenger; Facebook Messenger: adds VoIP; Facebook buys WhatsApp; WhatsApp adds VoIP; Facebook buys Instagram; Instagram adds video; Instagram cuts 22 minute sitcom episode into 109 15 second clips
  • Amazon buys IMDB, Goodreads.
  • LinkedIn buys SlideShare, Pulse.
  • Twitter buys Vine.
  • Line: adds VoIP.
  • Yahoo! buys Flickr, Tumblr.
What will be next?
  • All chat apps will add VoIP.
  • Photo sharing apps will add movies and games.
  • Social networks will add communication and media.
What will be the end game?
  • Social network enables sharing anything?
  • Social network focuses?
What is the best strategy to survive in the long term?
  • Build massive scale.
  • Choose your strategy: share anything/everything versus focus.
  • Introduce a subscription fee to lower churn in the longer term. Or stay with advertising.

Friday, February 21, 2014

Facebook/WhatsApp - what's next?

It's easy to be negative about Facebook buying WhatsApp: it's expensive, there are little if any revenues to show for, and there is a lot of competition. Not to mention that Facebook, without acquisitions, would arguably have no future.

But it's much more challenging to find the benefits.

First of all, Facebook is 'only' paying $4bn cash + a 7.9% stake. In other words, they are trading roughly 10% of the company for a new line of business.
Second, they take out a competitor, or to be more precise: they are merging with a competitor to keep their audience on board.
Third, no matter how competitive the market is (or rather: despite), WhatsApp has amassed 450 monthly active users - and growing. So, it is one of a very few services to actually put the network effect to work.
And fourth, monetisation will follow. A thin line need to be treaded if users are not te be alienated, but there are no doubt a plethora of possibilities - with so many users and user stats.

Finally, what's next? What could still be missing in the Facebook/Instagram/WhatsApp portfolio?
  • Vimeo: video
  • SoundCould: music
  • Evernote: notes
  • Flipboard: news
  • Foursquare: location

Monday, February 17, 2014

KPN Capital Markets Day: why a CFO is desperately needed

Ultimately, all stakeholders benefit when a company's management is transparant about its reporting and plans. For commercial reasons, there may be secrets from time to time, but an overall lack of transparancy will in term hurt customers, employees and shareholders. The stock market valuation will show a discount to the peer group valuation.

KPN's reporting leaves little to desire, with a deluge of numbers every quarter. And yet, transparency still is the major weak point at the moment and this explains why KPN desperately needs a new CFO. On February 19, KPN will host a Capital Markets Day and one can only wonder why this is scheduled, absent a new CFO.

Unfortunately, only those financial analysts working at financial institutions are invited (so much for transparency ...). But fortunately, the event will be webcast.

KPN had seen several CFOs come and go since CEO Eelco Blok took over in 2011. The position is vacant currently and filled on an interim basis by Steven van Schilfgaarde (in September 2013 he announced that he would leave the company, but 10 days later he was appointed interim CFO).

Here is why the company is in desperate need for a new CFO:
  • First of all, the position is vacant. Succession has been all too rapid since 2011 and the company needs guidance in more than one way.
  • Second, KPN issued no fewer than 4 profit warnings, lowered the dividend on 3 occasions and announced a rights issue. And all this within a time span of less than 3 years. At 13Q4, the Netherlands business was forecast to 'stabilise toward the end of 2014', rather than 'toward 2014', as it was put as recently as at the 13Q3 results, and so invisibility continues.
  • Once more, management appears to be reverse engineering the bottom line (2011: guidance on dividend; 2013: guidance on free cash flow), without giving guidance on the top line (which deteriorated, just when it was supposed to be improving).
  • The dividend is re-installed, pending the E-Plus sale, but it remains unclear whether the dividend is solely dependent on this sale, or whether it can be sustained by the current business and its cash flow.
  • Months after the rights issue, another EUR 5bn was announced to flow into the company as a result of the E-Plus sale. It remains unclear why KPN would need this extra cash.
  • The dividend policy needs to be run as way to distribute excess cash, not as a way of attracting investors. How come the dividend is reinstated at a time when the business deteriorates? Why is the company speculating about receiving dividends from Telefonica Deutschland? KPN appears to be hopeful that the debt level at TD would be raised to enable it to pay a higher dividend.
  • All this probably translates into guidance at the KPN level that is taken with a grain of salt by the market. Hardly anyone probably takes it all too literally at the moment.
KPN needs a very experienced CFO who can issue trustworthy guidance based on the underlying business progress. This should improve the quality of the company's guidance and bring back stability. KPN really needs to stop issuing profit warnings at just about every single quarter. No wonder America Movil insisted on appointing the CFO, should it acquire KPN. And a strong CFO will be good for the company's valuation.

Finally, here are some questions for the Capital Markets Day:
  • Which initiatives are put in place to turn Consumer Mobile around? What is KPN's response to current market trends? Remember, Tele2 is constructing its own LTE network, Ziggo and UPC will merge and launch a nationwide mobile provider and T-Mobile has a new mobile-only strategy.
  • How much will the expected opex and capex savings be ('hundreds of millions')?
  • What is the cost of VDSL2 + vectoring per home passed, including the cost of laying fiber outer rings? And how does that compare to the cost of FTTH (currently apparently around 850 EUR/HP)? And does it warrant a migration in focus from FTTH to VDSL?
  • Can the fiber outer rings be re-used by Reggefiber for its FTTH architecture, should KPN decide to step up FTTH investments in the future?
  • How do Tele2 and Vodafone (potential FTTH unbundlers) feel about KPN slowing down FTTH? (Let me guess: "You will need to ask them").
  • What are the plans for Belgium? When the planned sale of E-Plus was announced, focus was directed to the Netherlands and Belgium. However, silence around Base was rather deafening and one can only wonder why: is something big in the works (remember, selling E-Plus will deliver EUR 5 bn + a 20.5% Telefonica Deutschland stake)? Or is Base really up for sale again, given that Belgium is a notoriously difficult market?
  • What are the current takeover opportunities? In which part of the value chain is KPN interested?
  • Is iBasis a core holding?

Monday, February 10, 2014

Announcements to be expected for the Dutch market

What's up for 2014 in NL?
  • KPN starts to roll out vectored VDSL from February 2014 to 2.1m HP. FTTH to roll out to 250k HP more to a total of almost 2m. There supposedly is a trial of LTE Broadcast and from April FON will be integrated. A new CFO will be appointed. E-Plus will be sold, Reggefiber will be consolidated and America Movil will probably sell its stake.
  • Tele2 is rolling out its LTE network, but will probably launch in 2015. Plans are to unbundle FTTH, not with a time-frame. A new CEO will be appointed.
  • Vodafone is also set to unbundle FTTH and appears to be closer than Tele2. It will appoint a new MD for Vodafone Business.
  • T-Mobile will appoint a new CEO.
  • UPC will launch the Horizon Phone app.
  • Ziggo will probably launch a similar app. It remains to be seen what the next step in mobile will be.
  • NPO will launch NPO Plus, a paid version (better quality, fewer ads) of its catch-up service.
  • NPO, RTL and SBS will launch NLziet, bringing together their respective catch-up services (extended and non-free).

Saturday, February 08, 2014

The case for regulating the new Ziggo

Ziggo and UPC are trying to get their merger approved. What are the chances the regulator will approve this?

Primarily, footprints don't overlap, so nothing in fact will change and hence the merger should be approved. However, Ziggo becomes a near-nationwide player and hence the market does change, in regulator terms.

There may be some issues as a result of the fact that the new Ziggo will operate near-nationwide:
  • A level playing field with KPN is created and as a result 'symmetric' regulation would make sense, i.e. regulation of Ziggo or deregulation of KPN. Relevant markets: mostly broadband, but digital TV and triple play as well. One could assume that so far, Ziggo and UPC were not regulated because they were not nationwide - kind of a trade-off with the regulator.
  • Going nationwide will allow the company to expand, especially on the mobile market and on the business market. But these are new markets for Ziggo and as such no hurdle for approval of the merger.
  • Theoretically, both Ziggo and UPC have the option to compete against each other using KPN's networks and so the merger would reduce the number of potential competitors. Apparently, it is a non-official gentlemen's agreement that stops them from doing so. Also, technology (based around DVB-C and Docsis) prevents them from connecting their services to the KPN network (IP-based). But what really stops them, is the fact that they are vertically integrated and have no intention of becoming resellers or unbundlers. (Any provider globally could be seen as a potential competitor, so this point doesn't seem to make too much sense.)
  • On the wholesale content market, the company will have increased buying power.
Another consideration is synergy benefits. Will they be passed on to customers, or will they be re-invested into the company? Or will they be added to the dividend? The latter is the most likely choice, especially now that KPN is shifting focus from FTTH to VDSL - which could signal a truce and a duopoly.

We'll see what ACM makes of all this.

Tuesday, January 28, 2014

KPN preview 13Q4: slowing down Reggefiber for a truce with Ziggo

KPN's 13Q4 results are due February 4. The employee reduction program (4-5k in the period 2011-15) is probably ahead of course (reaching 4.5k). Already, at the 13Q3 results a new program was launched: simplification, aimed at distribution, customer processes and networks & IT, as well as reduction of jobs and products. At the same time, the capex budget was announced for the 2013-15 period: less than EUR 4.7bn, which includes Reggefiber in 2015.

Since the 13Q3 results, it has been relatively quiet around KPN, which is a good thing. Pending corporate issues include:
  • Will the E-Plus sale proceed? KPN hopes it to be cleared mid 2014. It will bring KPN EUR 5.5bn in cash and 20.5% of Telefónica Deutschland (valued at EUR 3.6bn, based on a call option Telefónica has). What does it intend to do with that?
  • What will America Movil do with its 29.7% KPN stake? This, as well as KPN's 20.5% stake in Telefónica Deutschland, is interesting for financial reasons only, not for strategic reasons. Perhaps there will be a swap and maybe America Movil will aim for all of Telefónica Deutschland.
  • Will the Reggefiber consolidation be approved? Probably yes and KPN counts on the last day of 2014 for this to happen.
Current guidance:
  • NL stabilises during 2014. EBITDA will still drop during 2014 on a yoy basis, but improve on a qoq basis. EBITDA will be flat in 2015. FCF will be flat in 2014 and improve in 2015.
  • Outperformance in Belgium.
  • Capex 2013: < EUR 1.7bn.
  • Capex 2013-15: < EUR 4.7bn.
  • Net debt / EBITDA to fall in the 1.5-2.5 range.
  • Synergies at E-Plus are conservative (EUR 5.0-5.5bn) and more leverage will allow Telefónica Deutschland to increase its dividend.
  • Impact on the fixed-line markets:
    • of the Ziggo/UPC merger
    • of T-Mobile's new mobile-only strategy
    • of the combination of CanalDigitaal and Online.nl
    • of Vodafone's and Tele2's plans to unbundle FTTH
  • Impact on the mobile market:
    • of the Ziggo/UPC/merger
    • of Tele2's migration to MNO status
    • of T-Mobile's new mobile-only strategy
  • The impact of new CEO's at Ziggo, Tele2 NL and T-Mobile NL.
  • KPN's LTE plans.
    • What next after reaching nationwide coverage in March? This gives KPN a 12 month headstart to Vodafone.
    • Where does LTE Broadcast stand? And LTE-Advanced?
    • How will it integrate FON?
  • Will there be a new job reduction program from KPN?
  • KPN's plans for Belgium.
Much of all this has to do with opex and capex.
  • Large opex savings are ahead:
    • The impact of the new simplification program, including job cuts.
    • The impact of LTE and FTTH.
    • In other words, large opex savings are ahead.
  • Implicitly, capex will drop as well:
    • Reggefiber's capex (passive assets only) was EUR 186m in 2010, EUR 291m in 2011 and EUR 381m in 2012. Let's assume stabilisation of roll-out in 2014 and 2015, then KPN is looking at EUR 380m in each year.
    • If KPN's capex in 2013 is EUR 1.7bn (excl. Reggefiber and E-Plus), then there is EUR 3.0bn left for 2014 + 2015 - and the latter will include Reggefiber's.
Further:
  • KPN's stance on stable market shares in 13Q3 could actually mean that it is settling for a stable broadband market share during 2014 and 2015 (on the TV market, the share grows by roughly 1 point per quarter).
  • KPN believes that 40 Mb/s is enough for now, but an upgrade to 200 Mb/s is required within 3 years. Also, KPN believes that 200 Mb/s could be sufficient for as much as the next 5-7 years.
  • KPN can do this provided the current VDSL + vectoring + pair bonding copper upgrade is successful. VDSL + vectoring enables up to 100 Mb/s and this is doubled with pair bonding.
Final conclusions:
  • The above implies a heavy capex reduction in 2014 and 2015. It looks like this will only be possible if Reggefiber's expansion is slowed down.
  • KPN appears to be looking for a truce with the cable companies.

Sunday, January 26, 2014

Ziggo: stepping into the same marketing pitfall plaguing the FTTH market

Cable marketing against FTTH is based on services, not infrastructure. This makes sense for the simple reason that consumers want services, not infrastructure. They couldn't care less about the underlying network. As long as the services are great. The network is the operator's problem. If it's broke, they will fix it.

FTTH providers base their marketing on infrastructure, and they appear to have some success in making the network the consumer's problem. "You want a future-proof network." Or: "gimme fibre". But it makes no sense from a marketing point of view.

Now, Ziggo, for its Ziggo Mobile marketing, is stepping into the same pitfall. They focus on infrastructure (WiFi) in their marketing instead of services.

What both FTTH providers and Ziggo Mobile should focus on is services. The network message should be directed to their shareholders. "Look, we are using superiour infrastructure, which reduces our opex."

Lessons for Ziggo:
  • Fixed:
    • Keep up the good work in the fixed-line area. Capex will keep rising - not the consumer's worry, but the shareholders' worry.
    • Maybe give FTTH another thought.
  • Mobile:
    • Refocus Ziggo Mobile's marketing. Stop talking about WiFi. Talk about price instead, because lower opex can and indeed will be passed on to consumers.
    • Reconsider Ziggo Mobile's network. WiFi is for off-loading and indoor coverage. But maybe LTE-2600 can be the core of the service offering. Cancel the MVNO on Vodafone. There's nothing like owning your own network.

5G: over-ambituous or under-ambitious?

5G research is gaining momentum. Huawei and Ericsson are aiming for 10 Gb/s by 2020.

Different stakeholders are involved:
  • Operators: Telefonica, Orange, Deutsche Telekom, Telecom Italia, Portugal Telecom, BT, DoCoMo,  China Mobile, Verizon.
  • Vendors: Ericsson, Alcatel-Lucent, NSN, Nokia, Huawei, Fujitsu, Samsung, Intel.
  • Universities: Surrey, NYU, Princeton, Stanford, Illinois, Texas, Cornell, UCLA, etc.
  • Governments: EU, UK, South Korea.
  • Others: BMW, Rhode & Schwartz, AIRCOM, Thales, etc.
New 5G institutions include: 5G Innovation Centre (Univ. of Surrey), METIS, ISRA (Intel) and 5G PPP (EC). There will be a summit in Brooklyn, NY, this April.

Some observations:
  • First of all, 10 Gb/s is not about downloading a DVD in under 1 second. Remember, this is shared capacity.
  • It remains unclear what 5G will be. After all, LTE has lots of room to develop and is an all-IP standard. LTE is now at 300 Mb/s and is approaching its goal (1 Gb/s) rapidly.
  • The time-frame appears to be very ambitious.
  • At the same time, aiming for a 10-fold capacity increase (from 1 to 10 Gb/s) doesn't appear to be very ambitious.
  • Stakeholder interest is to have standards set according to one's technology. This will create some first-mover advantage and patent income can be reaped.

Spectrum holdings in the Netherlands create opportunties, but not for Tele2

Spectrum in the Netherlands has been auctioned off in 2010 and 2012, leading to the situation shown in the figure. A few things stand out:
  • All holdings are roughly equal for the incumbents (KPN, Vodafone, T-Mobile).
  • T-Mobile has a lot of unpaired spectrum, which could enable TD-LTE and DSL-replacement services.
  • Tele2 has limited spectrum. This offers limited options for LTE-Advanced and Carrier Aggregation. And limited spectrum/capacity means limited options for a wholesale strategy.
  • ZUM (Ziggo/UPC) only owns 2600-spectrum, which could be used to lower wholesale costs to Vodafone. Ziggo has an MVNO on Vodafone and focuses on WiFi. An alternative would be to focus on the 2600-spectrum, offload to WiFi as much as possible, roam on Vodafone (or T-Mobile or KPN) and cancel the MVNO.