Outlook 2014 for Dutch telecoms market

We have produced a number of articles looking ahead to 2014 for each of the majors on the Dutch telco market. Here are the main questions:

• KPN:
• who will be the new CFO?
• offer from America Movil: unlikely?
• what to do with EUR 5bn from selling E-Plus?
• consolidate the Belgian market and become the prime reseller?
• buy Ziggo and UPC NL to create a national open access infrastructure?
• Tele2 NL:
• what will a new CEO mean for Tele2?
• when will the LTE-network be activated? will it lead to pricing pressure?
• how can the downturn on the fixed market be stopped? when will it start unbundling FTTH?
• Ziggo:
• the new CEO (Obermann from DT): his arrival alone would imply either no deal with Liberty Global, or a guaranteed career for Obermann within LGI.
• expanding the mobile strategy: nomadic rather than a full MVNO?
• OTT-partnerships: unlikely?
• UPC NL:
• will the merger with Ziggo happen? or will a reversed deal take place: Ziggo acquires UPC?
• what can the company do on a standalone-basis to improve its performance? will it follow in Ziggo's footsteps regarding mobile and WiFi?
• will it launch the UPC Phone app?
• will it hold on to the Horizon box, or explore alternatives? (cloud-based solution, TiVo, RDK, Frog by Wyplay, ...)
• Vodafone NL:
• when will it start unbundling FTTH?
• takeovers on the business market?
• T-Mobile NL:
• a new CEO is due, after Thomas Berlemann was sacked.
• how disruptive will the mobile-only strategy be? attack the DSL-market? deploy TD-LTE? follow T-Mobile USA's uncarrier strategy?
• how dependent will it become on Tele2? (2G/3G MVNO income, 4G network sharing income; network sharing cost savings) will it explore more wholesale opportunities?

There are so many opportunities for operators to return to growth, but resources (euros, management time) are scarce. One would wish that the operators would be aggressive, opportunistic and on the offensive, rather than following a me-too strategy, avoid risk and be on the defensive, but that remains to be seen. Ultimately, this is a matter of short-term versus long-term vision.

Ziggo outlook 2014: questions on Liberty Global, mobile and CEO

The main items for 2014 are the new CEO (René Obermann, from Jan. 1), expansion of the mobile strategy, the impact of Netflix, and obviously: an offer from Liberty Global.

Here are the details:

Corporate:

• Will LGI and Ziggo agree on an offer price? Or will Ziggo resist, like Telenet did?
• If Ziggo and UPC NL merge, what will be the consequences: improved financials, complex integration, regulation possibly.
• DT's René Obermann will take over January 1. What will his plan be?
• There is a chance of more small acquisitions in the business market.

Network and broadband:

• Docsis 3.1 is coming (2015?), but copper networks can match this (albeit over very short distances) with G.fast. Other competitors are FTTH, LTE and possibly Redstone's new technology.
• Further down the road are options such as all-IP and extension of the spectrum beyond 1 GHz.
• Alliances with OTT service providers cannot be ruled out, like ONO/Sony for PlayStation users.
• What is the impact of Netflix, on data usage and capex?
• Service provision over third-party cable networks may come to an end. After Kabelnoord, Cogas and Borculo will probably choose for exclusive provisioning by Caiway.

Television:

• The end of analog TV is nearing. This will release a large amount of spectrum.
• The Ziggo TV app may be extended with new options, such as nationwide usability (i.e. outside the Ziggo footprint) or a version for Xbox One and PlayStation 4.
• Ziggo could cooperate with Netflix to bring the latter's CDN (Open Connect) to its network. Or Ziggo could go one step further, like Com Hem and do a distribution deal.
• Will Ziggo endorse HbbTV?
• Possibly Ziggo will work with the Comcast RDK or Wyplay's Frog for STB innovation, i.e. a Horizon-like connected device.

Mobile:

• The WiFi network will be extended, using both CPE and public locations.
• So far, mobile services are SIM-only and for TV subs only. Will the service go nationwide, become a full MVNO? And become part of a quad play? Possibly with handset subsidies?
• Will the company ever use its 2600 spectrum? (Will the opex advantage outweigh the capex effect?)
• Will there be a VoIP app such as UPC Phone or BT SmartTalk? (Possibly as an extension of the current Visual Voicemail app.)

Conclusions

• Uncertainty and risk are at a maximum, simply because of the large numbers of questions (see above), exemplified by the arrival of a new CEO. DCF valuations will vary widely - giving Ziggo's management an easy job to claim a very high offer from Liberty Global.
• Assuming René Obermann takes up the CEO position January 1, he can either work with or against Liberty Global. Resisting like Telenet, will surely see him get sacked in the next few months. In other words: if Obermann indeed takes up the CEO position, a deal with Liberty and a friendly takeover are highly likely.
• A full MVNO strategy (with VoIP app) seems likely, since the current limited mobile strategy probably doesn't do enough for growth.
• OTT partnerships seem less likely than at ONO, Com Hem and Virgin Media.

Consolidation versus expansion

There are different types of consolidation:

• horizontal: when opeators focus on certain geographies
• horizontal: for focus on certain services markets:
• fixed, mobile
• consumer, business, wholesale
• communication, entertainment, web services
• vertical: when exposure to the value chain is reduced by selling infrastructure assets (sale, sale & lease-back, sharing):
• real estate: cabinets, towers, PoPs, data centers
• passive layer: mainly fiber
• active layer, managed services: equipment

Focus and consolidation make sense for several reasons:

• capital/cash flow may be scarce (capex)
• maximise revenues by concentrating sales efforts (opex)
• the economics and business models may vary widely (network vs. services)
• not compete with ones own customers (retail vs. wholesale)

We have seen examples of geographic consolidation. Services consolidation happens for instance at T-Mobile NL, which is going mobile-only. However, we have also seen expansion rather than consolidation:

• Verizon acquiring upLynk and EdgeCast
• Deutsche Telekom acquiring GTS
• Vodafone acquiring CWW and Kabel Deutschland
• TeliaSonera acquiring FTTH assets in Sweden
• Telstra buying DCA Health

Expansion can be driven by:

• expand to new markets (geographies, services)
• control a larger part of the value chain (infrastructure)
• scale, synergies

Geographic consolidation can easily be understood from a capex point of view. Verizon and TeliaSonera (see above) are trying to get control over a larger part of the value chain by adding CDNs and FTTH assets. Telstra goes one step further by venturing into the services business.

Consolidation as way to focus on a smaller footprint

Consolidation works on different levels. There is vertical and horizontal consolidation. As a result, the number of players in a certain geographic market can be reduced. But recent trends are more operator-centric: certain markets are sold to concentrate on a smaller footprint, in order to be able to carry a new investment (capex) round better - with the economy, regulation, extra-sector competition (i.e. OTT) and the rise of the NGN as catalysts.

This is what we have seen on several occasions recently:

• Vodafone pulling out of the US (Verizon Wireless) to invest in other regions (Project Spring).
• KPN pulling out of Germany (E-Plus). It remains to be seen where all this cash will go: to shareholders, to Belgium or to the Netherlands (with this kind of cash, KPN could even buy Ziggo and UPC NL to create a national infrastructure).
• AT&T pulling out of Connecticut (SNET) to focus on U-verse in 21 other states.

Multi-national telcos have been buying and selling a lot over the past few years (Tele2, UPC, Telefonica, Orange). We will see what will be next.

KPN in 2014: focus on Belgium for growth?

What's up with KPN in 2014?

Corporate

• KPN Business and IT Solutions will be integrated from Jan. 1, as probably will NetCo and Reggefiber when the final options are exercised. It will leave Reggeborgh with cash to expand in Germany (or indeed other countries where the incumbent has a VDSL strategy, such as UK and Belgium).
• America Movil could return with an offer for KPN in April. Orange too was interested. But don't count on anything. America Movil will most likely sell its KPN stake.
• The KPN foundation will give up its preference shares at the Jan. 10 EGM.
• The sale of E-Plus to Telefonica Deutschland, if approved, will leave KPN with cash (EUR 5bn) and a stake in the latter (20%). America Movil could get out of KPN (30%), take over the Telefonica Deutschland stake and aim for the German market. It remains to be seen why KPN needs EUR 5bn (apart from paying for regular dividends), after it raised EUR 5bn in a rights and convertible issue this year.
• One option would be to buy both Ziggo and UPC NL to create national, regulated, open infrastructure. KPN would reap huge synergies and could share these with the Ziggo and UPC shareholders. Passive infrastructure could be spun off to help pay for the deal.
• There's a settlement on its way over KPNQwest, for EUR 50m.
• There may be more alliances, as KPN already has with Reggeborgh (to be bought out), FON (to launch April 2014), Spotify, RTL/Videoland and Universal Music.
• Will iBasis be sold? It doesn't add much to the portfolio.

KPN Consumer Residential

• Competition increases from Tele2 and Vodafone, as both will unbundle FTTH. Also from combined efforts from CanalDigital and Online.nl.
• If Ziggo and UPC NL merge, competition will not change. Perhaps even to the contrary, as these quite different cablecos will require a lengthy and costly integration process.

KPN Consumer Mobile

• LTE will be nationwide by March 2014. FON (WiFi) to be added immediately after. There are trials for small cells and soon a LTE-Broadcast trial will commence.
• Tele2 NL will launch its LTE network probably towards the end of 2014. Since it is already an MVNO, competition will not immediately increase. It will not price LTE at a premium but as it migrates from the MVNO/3G/T-Mobile network to its own LTE network, it may gradually reduce prices to discount the cost advantages.
• Will Ziggo follow Telenet and beef up its mobile strategy and become a full MVNO?

Belgium

• Base will expand its LTE network and add LTE-800, for which it targets nationwide coverage at the end of 2014.
• Will Belgium (a small part of the KPN group) be sold or will KPN step up its efforts? It could be the prime reseller and competitor of both Belgacom and cable (Telenet, Voo, etc.), especially now that there's an open cable regime. Snow (the resold Belgacom 3P) apparently isn't very successful, but over time the sales process may be smoothened. Perhaps Base could even engage in local FTTH projects for the longer term (compare Vodafone and Orange in Spain, Italy etc.).

LTE will only add to pricing pressure

LTE delivers higher speeds, more reliable broadband, faster call set-up times, better voice quality and a prospect of continuous technology upgrades: LTE-A (advanced: carrier aggregation), LTE-B (broadcast or multicast), better competition with fixed-line broadband (DSL) and ultimately 5G.

There's a clear parallel with FTTH: high capex now (when densification and FTTS are taken into account), lower opex later.

Incumbents see an opportunity to raise prices, based on the LTE benefits and capex. But challengers (3UK, T-Mobile NL) and newcomers (Free Mobile, possibly Tele2 NL) will lower prices based on the desire to gain market share, the exploitation of LTE/FTTS capacity and opex.

It remains to be seen how aggressive Tele2 NL will be. They are not a true newcomer, but migrating from MVNO to MNO. Current pricing depends on wholesale tariffs set by T-Mobile NL, its MVNO (and LTE network sharing) partner. Migration will be slow, so prices may not be lowered at the launch (2014?) of Tele2 NL's own LTE network.

Ultimately, LTE will add to pricing pressure - as long as there's sufficient competition.

Bell Labs: there's a data center coming to a street near you

Bell Labs presents a study on data traffic (free download). It is based on a reference network architecture of metro networks interconnected by a backbone, US end-user traffic trends and certain assumptions.

Bottom line:

• Data traffic to grow by 560% from 2012 to 2017 (5 years). Sources of growth: demand for video (720%) and proliferation of data centers (440%), i.e. cloud traffic.
• Metro traffic growth 2x faster than backbone traffic growth.
• 75% of traffic to stay on metro networks (today: 57%) as a result of more data centers. This is called 'north south' traffic (between end-user and data center), as opposed to 'east west' traffic (between data centers).
• Video caching closer to the end user reduces overall traffic. Bell Labs distinguishes two cases: caching centrally in the metro network, or 'deeper' caching (closer to the end-user), which leads to a (unsupported) 41% reduction of traffic.

Some of the underlying assumptions (partly from Gartner):

• End-user data demand x3.7 (fixed and mobile, consumer and business).
• Pay-TV traffic x2.3.
• Non-traditional pay-TV traffic x7.5.
• Number of metro areas with data centers grows at a 10-20% CAGR.
• Number of data centers in metro areas grows at a 60% CAGR.

On the side: the number 560% probably is incorrect. The report (page 5) clearly mentions growth by a factor of 5.6 (see figure below), which translates into 460% growth (in which case 720% should possibly read 620% and 440% should possibly read 340%).

It remains to be seen how this translates to non-US architectures, but the number of data centers may explode as they are decentralised. What will it mean for ISPs, access networks, on-net traffic and net neutrality?

FTTH vs. HFC is about opex, capex and timing

The FTTH/HFC controversy continues. Our views are always in flux and here is an update.

1. The government should stay out. And if they wish to interfere, there's only one way to justify this: nationalize the infrastructure, and separate the network from services.
2. We assume that an all-fiber network requires 'high' capex, but saves 'considerably' on opex. Evidence is growing:
• KPN states that FTTH opex is at least 30% less than copper opex.
• FTTH capex is continuously falling, as best practices grow.
• At Ziggo, opex and capex are continuously rising. Capex is doubling over the last 3 years.
• UPC states that EBITDA (OCF in Liberty Global speak) margins will structurally head lower.
• Small cable companies in the Netherlands, that have no shareholders demanding decent quarterly returns, all do FTTH. Some even skip Docsis 3 and go straight from Docsis 2 to FTTH.
• Netflix is taking a toll. It simply must.
• Better compression and other efficiency gains are nice, but even at a 50% improvement, they only buy 1 year of delay, since data traffic grows at roughly a 50% rate.
• Stratix put out a report that calculates what the roadmap, as laid out by TNO, would cost in terms of capex. Stratix claims the TNO gigabit (!) roadmap would be more expensive than overbuilding with fiber.
3. "Cable (HFC) will serve the market well beyond 2020". This statement from TNO must be read in 2 different ways:
• To say this, is to state the obvious. Any network can last. But one network will require more work (HFC) than others (FTTH) in terms of opex.
• Most importantly, it is a responce to an earlier TNO report, covering the 2010-2020 period. It suggested to some that cable companies would cease to exist on December 31, 2020. Which is of course total nonsense.
4. What the opex/capex implications of infrastructure choices are, ...
• ... is relevant to the cable operator. "Do we upgrade our old car, or do we buy a new one?", so to speak. It's a matter of timing.
• ... is a priori irrelevant to the end user. It may translate into a slower network and/or higher tariffs, and then the end user hopefully has an alternative to go to.
• ... is also irrelevant to the government (see 1.).
• ... is not irrelevant to shareholders, which is why public cable operators claim that they have future-proof networks.

UPDATE December 3, 2013

• Supply side: is about fiber (or 5G), future-proofing, skipping interim technologies (VDSL, Docsis 3, ...) versus legacy
• Demand side: expected traffic growth and business model (scarcity or abundance)
• Customer's role is limited to becoming a subscriber or quit.
• Shareholder's role is limited to buy or sell shares.
• Government role is to regulate, facilitate and when the market fails: intervene.
• Management's role is to make a choice between scarcity/minimising capex and abundance/maximise capex; or strike a balance between customer interest (maximise capex) and shareholder interest (minimise capex).

Amazon in 2013: innovation at break-neck speed

The Amazon innvation factory is spinning at full speed. Just take a look at the sheer number of 2013 press releases. They can be ordered in this fashion:

• New stores:
• US: Entertainment Collectibles, 50+ Active and Healthy Living, Art, AmazonSmile (dedicated store where portion of purchase price goes to charity)
• Canada: Beauty, Health & Personal Care, Toys & Games, Groceries, Auto, 
• Delivery:
• Physical:
• Opening several large fulfillment centers across the US (1 in NJ, 2 in Cal, 3 in Texas, 2 in Florida, 1 in Maryland, 1 in Wisconsin)
• AmazonFresh (grocery delivery) trial in the US
• Sunday delivery in selected cities for Prime members
• Combining physical and digital delivery:
• AutoRip (free MP3 versions of CDs and LPs bought from Amazon)
• Kindle MatchBook (low-cost Kindle editions of books bought on Amazon)
• Print:
• licensing deals with Valiant
• own imprints (Jet City Comics, Kindle Singles Interview)
• Day One (weekly digital magazine, 20 $/yr)
• Streaming music:
• Cloud Player for Ford cars
• for iPad
• Streaming video:
• content deals for Prime Instant Video members (A+E, PBS, CBS, FX, Scripps, MGM, NBCUniversal, Viacom, Disney, Warner Bros, Oceanhouse, Houghton Mifflin Harcourt)
• distribution deals (Nintendo Wii)
• original content production
• Games:
• licensing deals with EA
• Devices (Kindle):
• Paperwhite (gen 6 r-reader)
• Fire HD and Fire HDX (tablets).
• OS: Fire OS 3.0 (Mojito)
• Other:
• Amazon Coins (virtual currency for apps, games, in-app purchases)
• Login with Amazon (single sign-in)
• Amazon Storyteller (turns script into storyboard)
• Second screen: X-Ray for Movies (based on IMDb)
• Kindle Worlds (UGC based on licensed characters and stories)
• Mayday Button (free live, on-device tech support for Kindle Fire users)
• Login and Pay with Amazon (for partners sites)
• Amazon Source (wholesale for book stores)
• Many developer services from Amazon Web Services
• Acquisitions:
• IVONA Software
• Goodreads (books social net)
• TenMarks (web-based math programs)
• Liquavista (screen tech)
• Evi (speech recognition)

The unsurprising conclusions:

• Innovation at break-neck speed. For physical and digital goods: print, music, video and games. Focus is on e-books and streaming video. So, expect more streaming audio (music subscription) and games?
• Infrastructure provider for its own but also wholesale (developers, 3rd-party sellers).
• Growing list of services and subscription-based services, many around Amazon Prime. On last count, there were 215 mln active Amazon customers and 10 mln Prime subs.
• Devices are limited now, possible additions: smartphone (project Smith), STB (code name Cinnamon), gaming console, etc.
• Expansion focuses on existing markets (Canada, Australia, Mexico). When will a new market be added?
• More acquisitions coming?
• Streaming audio service?
• Intel's connected STB unit Intel Media?
• Non-US e-commerce company?

UPDATE December 27, 2013:

• Delivery:
• fulfillment centers in Windsor (CT), Wroclaw (Poland)
• plans Prime Air (aerial 30 minute delivery by drone)
• pop-up stores in malls
• AmazonFresh expands to San Francisco
• Payments:
• launches 1c shipping for wine in the US (direct-to-consumer)
• credit card patent
• expands Amazon Coins to UK, Germany
• Amazon Coins can now be gifted
• Fire tablets can now be paid in installments
• Print:
• launches StoryFront imprint (shorts)
• Streaming music:
• launches Cloud Player for BMW and Mini
• Streaming video:
• distribution deal Lovefilm for Xbox One
• content deals Prime Video with PBS, A24
• launches Prime Instant Video in Japan
• all original content to be shot in 4K from 2014
• launches Storybuilder (digital notecards and virtual corkboard for writers)
• Devices:
• Fire OS 3.1 for tablets
• Membership:
• Prime adds 1m subs in 3rd week of December
• AWS:
• launches WorkSpaces (virtual desktop)
• expands to China
• Acquisitions:
• GoPago (partly: tech and team only)

Cable companies getting ready for IP and FTTH

According to Sandvine, Netflix is starting to have an impact in Europe. With traffic growing so rapidly, network operators must be worried.

In the cable sector, upgrades only buy so much time, as does the new HEVC standard. A 50% efficiency or capacity gain is nice, but it's wiped out after two years of traffic growth.

Looking at Ziggo and UPC Netherlands, we indeed see things moving:

• At UPC NL, capex almost doubled in 4 years time.
• UPC NL is stating publicly that EBITDA (OCF) margins are permanently going down. 
• At 13Q3, UPC NL's revenue was down 4.0%, while 'opex' (content rights, network ops, interconnect, customer ops) was up 7.4%.
• At Ziggo, capex is doubling in 3 years time.

What could be happening underneath, is cable companies preparing for the inevitable: IP (besides DVB) and FTTH (fiber deep). UPC has its Horizon smart STB out, which is fully IP-ready. And when adding homes passed in newly built areas (roughly 10k per annum at UPC and 15k at Ziggo), they have started laying empty ducts besides the coaxial local tails.

No more rubbish about failing IPOs, please

The Twitter IPO is drawing a lot of interest. A link to earlier IPOs is easily made. But people who claim that the Facebook IPO was a failure, have no clue about investing or the rules of the stock market.

In this otherwise interesting post, the author writes: "Facebook floated at $104b (massively overvalued, it took 15mo to return to that level)".

This fails on several levels:

• Facebook went public and hence its IPO was a success. Trading or IT systems failing, is an entirely different matter.

• The share price going down directly after the first trades doesn't change that either. And its subsequent reversal couldn't make an IPO right.

• Why would Facebook be overvalued? Where are the DCF calculations to support this claim?

• Has the value increased over the last 15 months? Is Facebook not overvalued now, just because the share price is above the IPO level?

The market value doesn't equal the 'true' value. Nobody knows the 'true' value. 'True' value is a personal valuation and depends on personal assumptions in ones personal DCF model.

The stock market works in two different ways. First, there is the game only professional investors play:

1. Fully understand the business to make the best possible estimates for growth and margins. This is the hard part and it is entirely personal.
2. Translate this into a valuation, using a standard DCF model. This is the easy part. Excel does the job. The value you arrive at, is your true personal value.
3. Compare this to the market value. The assumption is that the market will in due course recognise that you have the best assumptions (see 1) and hence the best valuation (see 2). If your valuation is lower than the market value, you are a buyer of the stock. If it is higher, you are a seller.

Second, one must remember that the stock market is a second hand market. Immediately after the IPO (or a new share issue), stocks are bought and sold in a closed market system. Investors are looking for the greater fool to sell stock to or to buy stocks from. DCF-based valuation doesn't come into play in this game, possibly only in the longer term or as a long-term beacon signalling excessive over- or undervaluation. There are lots of methods to play this game, most notably quantitative analysis and technical analysis. This game is played by both professional and non-professional investors. Obviously, professionals bank on finding these greater fools among non-professional investors.

Finally, let me ask you this. You walk into a computer store and buy a EUR 1,000 laptop. What is the true value 5 minutes after you leave the store?

• The wrong answer is: a lot less, because second hand laptops cost much less than new ones. This is not the true value, but the market value.

• The right answer is: this is a personal matter and depends entirely on the cash flows you expect to be generating from using this laptop (DCF approach, as above). And thus, to the buyer the value of this laptop is probably a lot more than EUR 1,000. After all, his job depends on it.

Put differently, there is a big difference between market value and true value. And it is not just that the market value is real-time available, whereas true value is a personal thing. That's only the beginning.

Twitter IPO is about innovation, advertising, Big Data and growth

Twitter's IPO is about a number of issues:

• Innovation. The service should not grow old with its user base. There has been some innovation recently (DM among non-followers, previews). It could use innovation to compete with Facebook, Instagram (via Vine), WhatsApp. The trouble is that Twitter by nature is a simple service, and hence innovation is more or less ruled out. Same as Netflix. (However, Netflix has passed a point of no return where it is quickly becoming too large to be overtaken by any competitor.)
• Advertising. So far, we have seen few formats (3), but when Google acquired YouTube, markets were equally skeptic over options to expand advertising on YouTube. Further, Twitter acquired MoPub.
• Big Data. Twitter sits on a ton of data. Apparently, tweets about TV shows make Twitter especially interesting to TV advertisers.
• Growth. Can Twitter accelerate?

Focus and natural ownership drive asset sales

Rationale to recent asset sales:

• Vivendi sells Maroc Telecom to Etisalat: sector focus for Vivendi and Etisalat is probably more of a natural owner of this asset.
• Deutsche Telekom to sell Scout24: not the natural owner.
• Telefonica sells O2 Ireland to 3 Ireland and Telefonica CR to PPF: geographic focus for Telefonica, reduce debt.
• Hrvatski Telekom sells infrastructure to Ericsson: operational focus (on services), reduce debt.
• Liberty Global sells Chellomedia to AMC Networks: operational focus (on broadband), away from content.
• Tele2 sells fixed-line network in Sweden to Telenor: operational focus (on mobile).

Bayonette (Norway) abandons the artificial scarcity model for broadband

We have written about artificial scarcity in the broadband market before and are happy to see an operator addressing the issue quite so literally - Norway's Bayonette:

"Networks make a lot of money by selling stepped internet connections. We think differently, and don't want to milk customers by offering different service levels that are only marginally cheaper to produce."

What needs to be added here is that a lot can be saved on costs, if an operator abolishes throttling ('stepped connections'). The number of propositions goes down dramatically (to one), with obvious implications for sales & marketing, as well as billing.

Bayonette's offerings is much like Google Fiber's: 1 Gb/s for 500 NOK/mo and there is a free service (3/1 Mb/s).

Telecoms: it's all marketing

It always surprises me how telecoms companies get away with funny statements.

• "We want to end handset subsidies". There is no such thing as subsidies. You always pay through your monthly bill, that you are tied to for 12 or 24 months.
• "Changing consumer behaviour". Consumers don't change, telco managers sleep. Yes, consumers stop using SMS and migrate to chat/messaging/IM apps that offer infinitely more features. But it's still texting what they do.
• "Most mobile subscribers need less than 1 GB of data per month". High pricing has forced us to use free WiFi whenever we can, but 1 GB really is NOTHING, even on a smartphone. Let alone on a tablet.

KPN: looking back to the Eelco Blok era

The end of the current KPN executive board could be near, so let's take a moment to look back to the Eelco Blok era, that started April 6, 2011. Let's first focus on things that didn't go so well.

• Finance/corporate
• Profit warnings: at 11Q1, and 11Q4.
• Dividend reductions: at 12Q2, 12Q4 and 13Q1.
• Rights issue: at 12Q4.
• Failed sale plans: Base (2012) and E-Plus (2012).
• Failed acquisitions: Caiway (2012).
• Overpaying (that is, what the market perceives) for Dutch 4G licenses: Dec. 2012.
• Sale of E-Plus to Telefonica: no consent form major shareholder and silence on what the cash will be used for (having just raised EUR 4bn in a rights issue): at 13Q2.
• Replacing most executives, threatening continuity.
• Business/government relations
• Raid by cartel office: Dec. 2011.
• Increased oversight by regulator: Dec. 2011.
• Attempts to control OTT services, leading to Net Neutrality regulation.
• Hassle over large government contract, in the end losing it to Tele2: 2011-2013.
• Fine KPN Business over illegal discounts: Jan. 2013
• Business/strategy
• Ortel expands into Europe, then is sold.
• Handset lease model introduced (2012) and abolished (2013).

As a result of all this, the share price dropped and the interest of investors was aroused. In the end, America Movil stepped in and will most likely replace current management.

The roll-out of new networks was somewhat successful. The LTE network was largely constructed even before the auction ended, allowing KPN to launch services just six weeks later. Pricing however hasn't been convincing. The FTTH efforts were strengthened by expanding the Reggefiber stake, by acquiring Reggefiber and Reggeborgh units, and by signing Vodafone, Tele2 and CanalDigitaal as wholesale customers. Still, adding 400k HP per annum is just too slow (see next post). When it comes to WiFi, the deal with FON took a long time to materialise and be implemented.

How about the services? TV and triple play services haven't been convincing for a long time. On the OTT front, cooperation was limited to Spotify.

All in all, there hasn't been a clear focus or growth strategy. Management was surprised by changing market conditions on many occasions, leading to a long list of profit warnings and dividend reductions. KPN turned into a defensive player with a hybrid strategy on several fronts.

No need to be afraid of America Movil

America Movil's planned offer for KPN worries some people. There are probably two reasons for this:

• Security: the importance of vital national infrastructure. Roads, railroads, water, gas, even electricity: they remain in government hands, even if services companies have been sold.
• Financial: the risk of breaking up the company, load it with debt, sell-off subsidiaries, extract cash, etc. The TDC scenario looms, i.e. the risk of under-investment.

As to the first, infrastructure is abundantly present and most routes have probably long been duplicated by the likes of Eurofiber (now majority-controlled by Doughty Hanson), Tele2 (incl. Versatel, BBned), Relined (government), BT, Verizon, etc. KPN is still dominant in the access network (DSL, FTTH, FTTO), but not in backhaul and long haul or in connecting network nodes and data centers. Business customers in many cases require redundant connections, i.e. from different providers. Further, there is ample regulation in place that KPN has to adhere to.

There is probably a sentimental reason for being worried as well: after all, America Movil is led by the world's wealthiest man, who unashamedly collected his wealth in a poor country. You can read all about it in this chapter. But if you read carefully, you will learn that:

• Carlos Slim is crazy about money. It is not he who fails (!), it is the Mexican government, that granted Telmex a 6 year monopoly and has since been unable to regulate the market in a proper way. You can blame Slim, but he acts merely like the hacker (or a Nick Leeson) who is looking for weaknesses in the system. It is the country that fails, and if it weren't for Slim, somebody else would have taken advantage.
• The Slim empire and Mexico have an 'unhealthy symbiosis', the writers claim. A monopoly does lots of harm, especially in a poor country. It remains to be seen where Mexico would have been without this company gathering all this wealth around it.
• Slim is now a major philanthropist, but this is all dismissed as 'white-coating', for PR reasons. He is also accused of 'green-washing'. While donating to charity and investing in green technology, Slim supposedly maintains an empire of companies that violate everything charitable or green. However, this is only underpinned by his stakes in cigarette production and by "customers who complain about high consumer rates and unstable connections". This doesn't seem to be enough to completely dismiss his good intentions.

Judge for yourself, but it is Mexican politics that is failing (and hell, all of capitalism if you will). Carlos Slim doesn't appear to be any worse than other people having been able to collect filthy amounts of money.

As to the second reason for worry over America Movil's involvement with KPN, this seems unjustified. America Movil isn't private equity, but a telecoms company. KPN may be broken up, but that isn't necessarily a bad thing. Especially if fixed and mobile are allowed to compete on the Dutch market. And if the government finds a way to block the takeover, they could still break-up KPN along the passive/active line, and deny America Movil the right to acquire passive network elements in the Netherlands. There will be plenty of interest in owning passive components (NBN, CIF, IPO, ...).

What will America Movil do with KPN's Dutch fixed-line network?

What's next in the battle for KPN/E-Plus, now that America Movil stated that it plans to offer 2.40 EUR/share for the remaining 70.23% of KPN that it doesn't already own (aiming for an acceptance ratio of at least 50%).

First, let's establish that this is all about E-Plus:

• AMXL has an interest in mobile only, as it sees an opportunity in Europe with low 4G penetration.
• Base (Belgium) is too small and KPN Mobile NL is small as well and too much hooked up to the fixed-line network. Hence, it's all about E-Plus.

Next, let's establish that AMXL is not amused with KPN's action to sell E-Plus to Telefonica Germany:

• AMXL's interest in KPN only pertains to E-Plus (see above).
• KPN apparently sold E-Plus without the approval of the AMXL supervisory board members (2 out of 8). Note: AMXL spent billions buying its 30% stake and supported KPN´s rights issue.
• AMXL cancelled the shareholder agreement, paving the way for the intended offer for KPN.

What will happen to E-Plus? A merger with Telefonica Deutschland will unleash synergies valued at EUR 5.0-5.5bn by KPN and Telefonica.

• KPN may still succeed in selling the asset to Telefonica Deutschland, because of the timing of its EGM. AMXL may then withdraw its offer for KPN, but will still be stuck with its 30% KPN stake.
• AMXL may stop the sale of E-Plus to Telefonica Deutschland, either through its intended takeover of KPN or through the KPN EGM (note: AMXL may already be a KPN stock buyer and have its stake increased beyond 30%). The KPN management will likely be replaced. America Movil may hold on to the mobile activities and sell the Dutch fixed-line operation. Next, AMXL may try to buy Telefonica Deutschland.
• Telefonica may launch a higher offer for E-Plus, trying to get approval from America Movil. If it succeeds, America Movil is stuck with the Dutch/Belgian assets of KPN.
• A third party may launch a counter offer for E-Plus. Only Liberty Global seems to be a candidate, as it too will see synergy potential from a takeover. Liberty is expanding into mobile and has a country-by-country approach, ranging from a full MNO in Chile to a 'heavy' MVNO in Belgium (with 2100 spectrum) and other places, to a WiFi focus in the Netherlands (with 2600 spectrum).

What will happen to the Dutch fixed-line activities of KPN?

• If AMXL gets stuck with the Dutch and Belgian units of KPN only, it may try to sell its stake (either 30 or 100%) in due course.
• If AMXL ends up with all of KPN, it may sell the Dutch fixed-line activities. In theory, there are several candidates: the Dutch government (afraid this 'vital' asset to come under foreign ownership), CIF (the Communication Infrastructure Fund managed by Rabobank, whose ideal is to create a national venture controlling all passive network elements in the Netherlands), the public (in an IPO) or a competitor (Vodafone certainly is a candidate, especially now that it is buying Kabel Deutschland).

All in all, it seems likely that AMXL will end up controlling KPN, including E-Plus. The question then is: will it separate the mobile and the fixed-line activities in the Netherlands? And what will then happen to the latter?

What will be the consequences for KPN Fixed? This will obviously depend on who ends up owning it.

• If KPN's Fixed and Mobile activities in the Netherlands are kept together, not much may change.
• If Fixed and Mobile are separated and KPN Fixed is sold, there will be competition between KPN Fixed and KPN Mobile/AMXL, as KPN Fixed may embrace a mobile strategy of some kind.
• KPN Fixed may increase network investments, which will be bad news for Ziggo and UPC.

Finally and in summary, here are the wild cards:

• Liberty Global may make a counter offer for E-Plus.
• Vodafone may buy KPN Fixed NL.

Proof is finally in: FTTH beats cable networks

Never trust the FTTH or the cable lobby for predicting the future. But the recent numbers from Ziggo and UPC NL are starting to show that indeed cable infrastructure is NOT future-proof. There is a clear relation between the rise of FTTH (and even VDSL) and the deterioration of the cable market in the Netherlands.

The point is that the fiber lobby has been stating for years that cable networks have inferior infrastructure. However, one could never tell from looking at the numbers, but that is now changing.

Ziggo and UPC have entered a phase of negative revenue growth (UPC NL Q2: -2.0%), network penetration is dropping (UPC NL: now below 60%), loss of market share on the video market is accelerating, growth on the broadband/VoIP market is slowing and is only sustained by upselling 3P's to 1P and 2P subs.

At the same time, profitability is falling to a structurally lower level: Liberty Global: "... the Netherlands is experiencing significant competition from the incumbent telecommunications operator, who is overbuilding our network in the Netherlands using FTTH and advanced DSL technologies. As a result, the Netherlands is experiencing lower operating cash flow margins during 2013, as compared to 2012, and we believe the Netherlands will be challenged to maintain its current operating cash flow margin during the remainder of 2013 and future periods".

Entering the mobile market, not with a WiFi-based network (as Ziggo has been testing) but with a true MVNO, will boost revenue growth. But there is much less room to maneuver on the Dutch market, compared to Belgium where Telenet shows +12% revenue growth. And worst of all: margins of an MVNO are very small and will first be negative, further reducing profitability.

And it's not only opex that is rising, it is capex as well. At the end of 2009, capex/rev (-12 months) at UPC NL stood at 13.1%, it now stands at 19.2%.

Hence, a merger of Ziggo and UPC makes sense - for the short term. But it will be only a matter of time before Liberty Global decides to abandon the Dutch market. Two losers can't make a winner.

EU single market for telecoms: international roaming major stumbling block

Neelie Kroes is aiming for a single market in the EU for telecoms. Everybody would agree with this concept, but there are several serious issues. Let's look at the main constituents of the single market:

1. Net neutrality
2. International roaming
3. Harmonisation of regulation and spectrum management

All this would add 0.9% to GDP, or EUR 110bn per annum through innovation, new business models and enhanced demand.

1. Net neutrality: adapt or die

NN can be seen as a way to protect the OTT/CSP sector against blocking and throttling by ISPs. Competition at the services level increases, and ISPs (the incumbent) want something in return.

To ease regulation (open access to wholesale customers at layer 2 or 3) doesn't make any sense, however, because regulation covers the relationship between the incumbent and its wholesale customers, not the OTT/CSP sector.

It looks like this is just tough luck for the incumbents: times are changing, managed services are disappearing, adapt or die. They need to focus on broadband (fixed and mobile). And to die isn't all that bad (looking at it from a national security point of view), because infrastructure will always be an attractive asset, even when auctioned off in case of bankruptcy.

2. International roaming: not realistic

While sympathetic, this is as ambitious as leveling the price of bread throughout the EU. Costs (opex) vary dramatically across the EU, so how could wholesale (let alone retail) pricing of an MB be equalised?

3. Harmonisation: lengthy process

Operators would be allowed to do business across the EU - as if that wouldn't be possible today. Next, they could choose which regime to follow - which makes no sense. Harmonising spectrum is ambitious but sympathetic, with current license expiring at vastly different points in time.

LomboXnet: electric cars as storage devices in a solar powered smart grid

LomboXnet, the small-scale ETTH network in the Lombok part of Utrecht, is making an interesting turn. As it awaits a viable IPTV solution, it has decided not to expand the network, for now at least. Instead, it is developing a smart grid, based on the ETTH network, several solar plants and ... storage!

Solar panels are mounted on rooftops of local schools etc. and the smart grid will help to match supply and demand as much as possible. Weather forecasts will be included in the input. This is where storage comes in, and the company has decided to allow electric cars to act as storage devices for the grid and the local community. Charging and home use will alternate, depending on weather conditions.

A few numbers from the solar industry (approximations):

• Existing electric cars (Nissan Leaf) have storage of c. 24 kWh, enough to run a household on for c. 3 days and LomboXnet for c. 8 hours.
• New electric cars (Tesla S) can fully charge at c. 20 kW, which translates in just half an hour. Storage is 85 kWh. Any full day's drive in the Netherlands normally doesn't use more than half of this, leaving the rest for home use. Such cars are currently cheaper than buying comparable storage capacity on a stand-alone basis.

Local (de-centralised) energy production and storage may mean the end of large energy distribution & network companies, although for now they will be needed to make it through the night and through the winter. Solar energy is becoming ever more viable by the day, as a result of increasing efficiency of both production (solar cells are becoming better, faster and cheaper) and storage (driven by the smartphone/tablet/laptop industry).

War of the words continues between fiber and copper

Recently, the Dutch cable sector (i.e. Ziggo, UPC and NLkabel - NOT the smaller cable companies and CIF) decided to step up its lobbying efforts against the fiber lobby (led by Reggefiber/KPN). It all seems to come down to the use of the words 'future-proof' (toekomstvast or toekomstbestendig). Now, unfortunately, Hartwig Tauber of the FTTH Council Europe, decided to enter into this silly discussion, claiming that FTTH is the only future-proof network:

“Fibre to the Home is de enige toekomstbestendige oplossing. Consumenten profiteren nu al van glasvezelverbindingen die 1 Gbps en meer bieden voor het up- én downloaden. Bovendien is Fibre to the Home in staat een niet te kloppen servicekwaliteit te bieden. In plaats van consumenten te misleiden met maximumsnelheden kunnen Fibre to the Home-netwerken aan ieder huishouden een gegarandeerde snelheid leveren. Operators die gegarandeerde snelheden van 100 Mbps en meer aanbieden, bevestigen dat klanten tevreden zijn met die snelle verbindingen.
Er zijn echter nog steeds spelers op de markt die stellen dat hun koperoplossing toekomstbestendig is, omdat consumenten geen hogere snelheden nodig hebben. Het logische gevolg hieruit is dat deze partijen hun klanten voorschrijven wat toekomstbestendigheid inhoudt en de ontwikkeling van innovatieve diensten belemmeren, waaronder diensten met grote socio-economische voordelen.”

Of course, this is total nonsense. No single network is future-proof. Every network needs work: maintenance, repairs, upgrades, etc. And it all starts with the question: is this about the passive or the active components? Fiber appears to be the way forward, but you can never tell; and 100 Mb/s equipment seemed to be enough, until Reggefiber decided to upgrade to 1 Gb/s - with implications for backhaul (i.e. fiber) as well.

And then there is the use of the words future-proof: linguisitically (semantics), it is incorrect to talk about 'more' or 'less' future-proof, in the same way as it is nonsensical to say that something is 'more perfect' or 'less perfect'. Something is either future-proof, or it isn't. And no single technology is future-proof.

We have been proponents of FTTH for many years, but the discussion has to be fair. NLkabel and the FTTH Council are bending the truth (to say the least). And this isn't helping. Of course, fiber is better than HFC: more capacity, easier to upgrade, symmetric, open. But FTTH is on the roadmap of HFC as much as it is on the roadmap of copper networks.

Unfortunately, Hartwig's statement fails on more points:

• He forgets to mention openness.
• He talks about bandwidth guarantees, but networks are all shared at some point in their architecture.
• He doesn't distinguish between GPON ('shared') and WDM-PON and p2p ethernet fiber (dedicated) networks.

We have written on the subject twice recently. In summary, there are three points to be made, two of which are mostly overlooked:

1. FTTH beats HFC in many respects (see above). Cable operators are billing their networks as NGNs, which is total nonsense. One needs to distinguish between the passive and the active networks. Every network can be upgraded. FTTH is on the roadmap of all.
2. There is a sharp distinction between the advantages for users (QoS, real estate value), for operators (capacity, opex, new business models) and for governments (socio-economic and environmental benefits).
• Fact is, that many cable customers still are happy customers.
• Fiber operators are trying to make the network a worry for their customers ('choose the network that is most future-proof'), but the customer shouldn't care. The network is the operator's worry. Fiber operators also claim that cable networks cannot keep up, but again, that is the cableco's worry. Or that they can't afford it - which is probably true, but let John Malone worry about that. If their upgrades start falling behind demand growth, the market will do its work and subscribers will migrate to FTTH. There's one problem though: FTTH penetration. In areas where FTTH will not be deployed for many years, HFC only competes with DSL and hence has no incentive to move to all-fiber, which could create a digital divide.
• The government has no voice, because it decided to leave telecoms to the market (apart from rural areas, where the market fails), and so: either shut up or create a national infrastructure, either the Australia (nationalisation) or the Singapore way (tender).
3. The way the market works, is that capacity is added as demand grows. Business models are based on scarcity. Moving to an all-fiber gigabit network is a big leap and only makes sense when other forms of upgrades make no sense from a return point iof view, or when new business models, based on abundance, are explored.

Dumb-pipe operator or dumb pipe-operator?

Two remarkable releases from the Dutch mobile industry:

• Vodafone NL CEO Rob Shuter on the company blog: "The multiband auction last December brought an unexpectedly large windfall for the Dutch treasury of EUR 3.8 billion. For us, however, this meant a solid bill shock of 1.38 billion! We were obviously fully aware when auction prices for mobile frequencies were established, but all parties agree that the prices were much higher than expected."
• KPN, Vodafone NL and T-Mobile NL are suing the Dutch government over the 2012 multiband auction. Vodafone claim that reserving spectrum for a newcomer created artificial scarcity.

It is rather ironic to have mobile phone companies complain about bill shock and artificial scarcity, because these are at the heart of the industry. In fact, they have sort of invented those terms.

As to bill shocks: mobile operators charge ridiculous prices for international roaming (which next year will end) and for some reason there is still no pan-European pricing (T-Mobile Austria charges €17 while T-Mobile Germany charges €96 for the same smartphone tariff allowances). Further, the companies are using the fact that most people didn't see high prices coming (we did), which created a buzz in the press about overpaying. But in reality, other auctions brought in more on a per MHz per capita per year basis. And the result wasn't impressive in relation to the 2011 UMTS auction. And last but not least: buying a 17 year mobile license creates an enormous entry barrier and comes at the expense of EUR 230 per sub or just over 1 euro per month per sub for Vodafone.

As to artificial scarcity: this is exactly what telecoms operators create, slicing & dicing available bandwidth (i.e. throttling) in order to create a 'business model'. Mind you, this whole throttling of a 24 Mb/s ADSL service to tiers of e.g. 1, 2, 4, 8, 12 and 24 Mb/s (or a 1 Gb/s service to 50, 100, 200, 500 and 1,000 Gb/s) is extremely expensive from a capex/opex point of view (equipment, billing, marketing) and is hardly warranted by the associated costs (a 24 Mb/s sub is probably not much more expensive than a 1 Mb/s sub).

Yahoo!/Tumblr: combining UGC and social networking is where the action is

Yahoo! is acquiring Tumblr. The specs:

• 117m users (growing 120k per day), 108m blogs, 300m monthly active visitors
• 75m posts per day, total 51bn
• Raised $125m
• 2012 revenues $13m
• 175 employees
• Combining with Tumblr will grow Yahoo!'s audience by 50% to 1bn and traffic by 20%.

Tumblr is a combination of user-generated content (UGC) and social networking, like Instagram (Facebook), and in a sense comparable to Pinterest (pictures), Waze (social mapping & traffic info, going to Facebook). Flickr (Yahoo!) could expand its social functions as well, as could YouTube (Google).

Pulse went to LinkedIn and Yammer to Microsoft. Other obvious takeover candidates are those that in a way combine UGC and social networking:

• Pinterest (pictures)
• PhotoRocket (photos)
• SlideRocket, SlideShare (presentations)
• Evernote (notes)
• SoundCloud (music, audio files)
• WordPress (blogs)
• Quora (Q&A)
• Path (mobile social net)
• Dropbox and Box.net (storage)
• Twitter (text-based microblogging)

More on access and services

Telecoms is moving away from its 4 traditional silos: fixed voice, broadband, TV and mobile. A more compelling way of looking at it now is (see previous post):

• Two enablers:
• Devices (portable and non-portable)
• Access (fixed and mobile)
• Two classes of services:
• Communication (voice/video calls, text/IM/chat, M2M)
• Entertainment (TV/catch-up/VOD, gaming)

And thus:

• This could be the basis for new regulation.
• The distinction between managed (traditional voice, SMS, TV) and OTT services is becoming less meaningful. Net neutrality is used to create OTT competition to managed services. The call (mostly from the fiber community) to create new and compelling services ('killer app for FTTH') seems quite ridiculous, considering the innovation going on in the OTT space. And as witnessed by the thousands of apps available on smartphones. Not to mention that it is the world upside down: we are not looking for new services to justify the roll-out of NGA networks; we are rolling-out NGA networks to keep ahead of demand (c.q. commoditise bandwidth, put an end to throttling, remove bandwidth as an artificially scarce resource) and especially because of the implied opex savings.
• A distinction between telco and cableco no longer makes sense.
• Access:
• Each of these markets are very competitive, except access. Unless it no longer makes sense to distinguish between fixed and mobile. LTE allows mobile operators to offer fixed-line replacement services, WiFi allows fixed operators to launch quasi-mobile services. Governments could consider to allocate lots of spectrum for unlincensed use to make sure that technologies such as WiFi increase competition.
• The access market is core for telecom operators. It creates subscriber ownership and generates fat margins (whatever the operators claim). Operators are now throwing in free services to attract/keep broadband subscribers e.g.:
• KPN: free access to Spotify Premium.
• BT: free access to BT Sports.
• Communication is traditionally voice and SMS. A third leg is M2M, e.g. DT's usage-based insurance (mobile) and home automation such as AT&T Digital Life (fixed). The commonality between these services appears to be: sensors.
• The 'entertainment' market is still developing. It consists of video (live TV, catch-up TV, VOD) and gaming. Will there be a third leg?

The new dichotomy of connectivity and services

Technological innovation, competition and regulation shape the telecoms sector. The entry of OTT providers has one the one hand been more of the same, but on the other hand it is causing big changes. If we take a step back to see how the sector changed over the past two decades or so, this is what appears to be going
on.

First, let's look at what we have to work with:

• Telecoms is a privatised free market.
• Regulation consists of defining markets, ascribing significant market power and applying remedies (on the wholesale or retail level).
• There are two infrastructures (in most countries to at least some extent): copper (nationwide) and coaxial (regional).
• Telecoms is a scale business. The entry barrier (capex, licenses) is very high. It has a tendency towards a monopoly, duopoly or oligopoly.

In the old days, the wider telecoms market was about traditional managed services (voice, SMS, TV). There was a somewhat artificial distinction between line rental (basic charge, fixed) and a usage-based fees. Competition was inter infrastructure (copper vs. coaxial) of intra infrastructure (unbundling, reselling). A three-layer model (passive, active, managed services) could be applied. The incumbent telco was regulated, the local cable company (lacking nationwide coverage) was not. When services such as CS and CSP rose, a rebalancing in the voice market started to happen: as usage fees went down, line rental charges went up.

Today, a fourth layer is added: IP, enabling OTT services (VoIP, IM, unmanaged IPTV). Unbundling appears to be too expensive for most challengers, but OTT brings a new form of competition, at least in the services space. Infrastructure-based competition is reduced to copper (upgraded to fiber) vs. coaxial (HFC). A rebalancing is going on, as traditional managed services are being replaced by non-managed OTT services. The new distinction is between service revenues (dropping) and connectivity. Limited infrastructure competition may lead to rising connectivity prices. Especially when the infrastructure players not only see services revenues dropping, but at the same time investments must be made in NGA networks (FTTH, LTE, WiFi). Hence, they are asking for a regulatory holiday to first roll out the NGA and accept regulation at a later stage.

In the services domain, net neutrality rules are designed to protect the OTT players in order to create a higher level of competition. Looked at it this way, other regulation is no longer needed.

That leaves lots of questions regarding connectivity:

• Is two enough in fixed-line competition (copper, coaxial)? In mobile, is three enough?
• Is LTE a fixed-line replacement? Is WiFi a mobile replacement?
• Is infrastructure a natural monopoly? Is it really a utility, such as water, gas, sewer, electricity?
• Is structural separation the answer? Is regulatory symmetry needed, i.e. structural separation of cablecos as well?

Ziggo: piecing together an OTT mobile strategy

Fixed-line operators are looking to (re)enter the mobile market, despite threats from OTT, other competition, regulation and a stretched balance sheet. BT bought spectrum and is now looking for a partner. Virgin Media UK has an MVNO and plans a VoIP app. Ziggo appears to take its own route, involving WiFi, femtocells, an MVNO and a VoIP app. Here's how it may work.

• WiFi. All customer modems will be opened for use by Ziggo subscribers. It's much like FON (a KPN partner), except Ziggo has a dedicated piece of spectrum reserved for use by fellow Ziggo subs. As a result, the modem owner will not see his (shared) spectrum reduced by strangers.
• Femtocells. One might think that Ziggo, UPC and the other cablecos could allow each other to place femtocells outside their own footprint in order to reach nationwide coverage. But Ziggo is taking femtocells further and plans to expand the (very limited) footprint of its subscriber modems. It intends to roll-out femtocells to locations outside subscriber homes, possibly lamp posts or anywhere near the existing fiber backbone or backhaul from street cabinets. It now becomes clear why Ziggo bought LTE-2600 spectrum.
• MVNO. Ziggo already has an MVNO in place, with Vodafone NL. Customers do not need to sign up, but then they won't have full mobility. That would
  require a SIM card (hence subscribing to the MVNO). Ziggo will probably go SIM-only, and possibly data-only, if they manage to create a solid:
• VoIP app. At the recent Q1 call, management promised a VoIP app for 14H2.

There are plenty of challenges: a saturated mobile market, rolling out femtocells on a large scale, creating seamless handover between WiFi and 3G/4G, doing a stable and customer-friendly VoIP app. And hope that the network supplier (Vodafone) doesn't give in to the temptation to block mobile VoIP, violating Dutch net neutrality rules.

The mobile strategy looks a lot like an instrument to reduce churn. But it also has the potential to grow into a business and a new revenue stream. For this to happen, subscribers will actually need to join the MVNO (hence creating a quad play, mostly).

All in all, Ziggo is developing an interesting strategy to add mobile by going over-the-top.

Ziggo's share price rise: the good, the bad and the ugly

Ziggo's share prise has been on the rise over the past few months, despite deteriorating results. There are (at least) three possible explanations:

• The good: investors are banking on a return to growth, based on either mobility or yet another off-net revenue stream.
• The bad: investors are assuming that existing strategies (marketing and up-selling) can restore growth.
• The ugly: investment banks are pushing the stock among their institutional investor customers a. to make the share prise rise, b. to make nice with the Ziggo management and c. to get a slice of the pie once a public offer from Liberty Global needs to be executed.

KPN: preview to 13Q1 results (April 23)

KPN's 13Q1 results are due April 23, before the market opens.

Looking back to the 12Q4 results:

• Weakened results.
• Rights issue announced.

Guidance:

• NL: market share broadband 40%, longer term 45%, market share mobile >40%, 'leading' on the Business/ICT market; overall stabilisation toward 2014; EBITDA margin mid term 40-45%.
• Germany: long-term market share 20%, margin 30-35%; 2013 margin down.
• Belgium: long-term market share 25%, margin 25-30%.
• Overall 2013: capex EUR 2.3bn, dividend 3 c/share, net debt/EBITDA toward 2.0-2.5.
• Overall 2014: dividend 3 c/share
• Beyond 2014: consolidation Reggefiber not before 14H2, capex cumulative 2013-2015 EUR 7bn (incl. Reggefiber).

Market consensus 13Q1:

• Revenue EUR 2.95bn.
• EBITDA EUR 1.00bn.
• Net income EUR 310m.

Recent issues:

• The results for 2011 and 2012 have been slightly restated to account for IAS 19 and for the splitting up of Corporate Market (formerly Getronics) - most migrates to Business, the rest continues as IT Solutions (data centers, consulting services, workspace solutions).
• The Reggefiber takeovers (approved April 2012) and the Reggeborgh takeovers (approved October 2012) create an unequal comparison basis. Same for the sale of Getronics International (May 2012).
• When will the rest of RoutIT be bought (KPN acquired 12.5% in September 2012).
• During 13Q1 the 4G-licenses were paid for (EUR 1.35bn).
• Rights issue EUR 3bn was approved and will follow after the 13Q1 results. EUR 2bn in hybrid bonds was already raised.
• What will the cooperation with America Movil (29.8%) lead to?
• According to fresh market rumors, E-Plus and O2 Germany are working toward some form of network sharing.
• Fixed network outsourcing to Alcatel-Lucent. KPN Business sold a maintenance unit.

New markets:

• LTE and DC-HSPA services in NL.
• Partnered with FON in NL.
• Mobile network for Alliander (energy grid operator).
• Quad play in NL (KPN Compleet).
• Triple play in Belgium (SNOW).
• Accenture is now developing IPTV for KPN (taking over from NSN).

Other issues:

• How are the results developing, especially in mobile? Can guidance be maintained?
• How is the DSL market doing? What was the effect of the winter on Reggefiber?
• Will the EUR 3bn rights issue suffice, or does the leverage need to be reduced further?

Doing FTTC is ignoring a family of elephants in the room

The reasons to do FTTC/VDSL/vectoring instead of FTTH are obvious: they are about capex (cheaper) and demand (supposedly there isn't any). But when BT, DT and the Coaliton in Australia gamble on FTTC, it creates a family of elephants in the room. If you want to do FTTC, that's fine, as long as you acknowledge that it has a few issues.

1. Cost
It may save on capex, but FTTH saves on opex. And if FTTC proves insufficient, it risks being a 'regret investment'. It is going for the short term, instead of the long term. Put differently: the greatest benefit of FTTH is its opex savings of around 20%.
Further, vectoring is still quite experimental. It is completely unclear what the real-world performance will be and which share of the lines it can be applied to.

2. Demand
Doing a bottom-up assessment of the number of devices per household and the usage per device may render a picture of the demand side, but it completely ignores innovation and unexpected use cases. 4K is moving faster than previously expected and gaming may be a major growth driver.
To be fair, ongoing compression is relevant and also the fact that we are moving from a downloading to a streaming world. And streams are offered at a certain fixed rate. Making the access network 'faster' doesn't help. And the access network isn't the only bottleneck in the system.

3. Quality of service
Any bandwidth will suffice for anybody, as long as we don't care about QoS. As demand rises and networks aren't upgraded at a similar pace, QoS will go down.

4. Geography
If one could isolate the 30% (or whatever it is) that would be willing to pay for a gigabit, it would be easy to roll out FTTH there, and FTTC everywhere else. Only this doesn't work for several reasons: people move every 7 years or so; building nationwide FTTH in any country will probably take 10-20 years; and the 30% that needs a gigabit changes every month, so in reality it is probable closer to 50% (or whatever it is). Compare Cisco's statement: "the top 1% is actually the top 5%".

5. Business model
Traditional telcos are rooted in scarcity. They will upgrade not ahead of demand, but somewhat behind demand (in such a way that complaints are controllable). It is their game to minimise capex in order to maximise shareholder remuneration. And capex peaks are to be avoided, when shareholders must be reported to on a quarterly basis.
Google on the other hand is rooted in advertising. Governments, like Google don't want bandwidth to be a scarce resource. Google because it wants to maximise usage in order to create advertising inventory, governments because of the economic, social and environmenal benefits of migrating online.
Both business models can be applied, but looking at it this way explains why others besides incumbents are getting involved.

6. Specs
FTTH is not about download speeds alone, but also about the uplink and latency. And if it's not GPON but point-to-point, it is also dedicated instead of shared.

7. FTTH has a lot of supporters
Governments such as the current one in Australia, Google, KPN (sees FTTC as an interim technology), challengers such as Free and HKBN, several cable companies, etc. prefer FTTH over FTTC for any or all of these reasons.