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?