What next for KPN in 2015?

Let's look at the big picture:

• KPN heavily outsources and offshores functions. This implies de-emphasising the network, at least at the management level. Things are left to vendors such as Ericsson. NFV/SDN will only add to this. As a consequence, the emphasis is more on services.
• Market shares are high in general, leaving little room for domestic takeovers.
• There is ample cash, even taking into account debt reduction (€ 2 bn), pension fund (€ 200 mn), the Reggefiber buy-out (€ 770 mn) and cash outflow at Reggefiber (a total of probably half a billion or so over the next few years). The sale of E-Plus left KPN with € 5 bn and a 20.5% stake in Telefonica Deutschland (value € 2.5). Further, Base (€ 800 mn or more) and iBasis (pocket change) can be sold. In all, the war chest could be € 5.5 to 6 bn.
• KPN ended its pan-European MVNO strategy a few years ago.
• KPN wasn't willing to sell to America Movil (at 8 €/share), a very unfortunate decision.

Based on this, KPN is more of a hunter than a target (E-Plus was the company's prime asset). Assets for sale:

• Netherlands: Caiway, Delta Cable, T-Mobile NL,  Eurofiber (all impossible because of concentration issues), Film 1 (no interest), M7 Group.
• Europe: Bouygues Telecom, Orange Swiss, Sunrise, Yoigo, fibre operators in Germany & Italy, Telefonica Deutschland.

Creating value, other than focusing on the core businesses, could involve a major strategy shift:

• Structural separation. Spinning off is a good idea. Network & services are different animals. KPN could retain a stake in the NetCo. Vodafone and Tele2 could buy into the NetCo to speed up FTTH overbuilding.
• Acquire M7 Group (compare AT&T/DirecTV). This will strengthen KPN's position on the TV market. Vodafone and Tele2 may also be interested.
• Gain control of Telefonica Deutschland to re-enter Germany, but now as a full-service provider.
• Buy fibre operators abroad to export the expertise built up in Reggefiber.
• Buy independent mobile operators across Europe. A tie-up with Proximus could be considered. Or even TeliaSonera, bundling together more incumbents.
• Takeovers in other parts of the value chain (compare Telstra/Ooyala or Verizon/EdgeCast).
• Expand in content through a broadcaster: SBS or RTL (compare Comcast/NBC).
• Sell the company. Possible buyers: Altice, private equity.

Capex: up for differentiation, down for extortion

Capex is weighed carefully against dividends. Capex is for longer term competitiveness, dividends are for short term investor satisfaction.

Reducing capex is hazardous, since it endangers the operator's competitive position. Capex enables differentiation. Smart investors will not be fooled.

If capex is reduced across the board, the cause may not be clear and can be any of these:

• It's typical herd behaviour of management executives lacking vision, focusing too much on short term dividends for personal gain.
• It's proof of insufficient competition among ISPs.
• Market conditions deteriorate for all players, due to general developments (economy, regulation, technology development).

At the end of the day, capex still enables differentiation. Hence, capex reduction seems to point to insufficient competition or bad management.

Threatening to reduce capex appears to be a form of bluff as well as extortion or black mail of governments.

Data-only providers: do they add to mobile competition?

There are several new entrants waiting to enter the mobile markets. Most are using LTE as the new, more spectrally efficient technology, which allows players without legacy to disrupt the market.

• The latest is Swan in Slovakia, with a wonderful unlimited offering of just 5 €/month.
• Others include Ukko Mobile in Finland,
• Midas in Poland,
• Ice in Norway, Net 1 in Sweden & Denmark,
• Digi in Hungary.

This is interesting in two ways:

• How will it affect the market? Will prices drop, as they did in France? How will the incumbent operators respond?
• Do data-only providers (in Finland, Slovakia, Norway, Sweden and Denmark) add to competition, even if they provide no (legacy) voice/SMS services? Are services such as Skype/Skype Out and Viber/Viber Out considered fully-fledged voice services? And how about WhatsApp, Facebook Messenger, Kik etc. on the texting market?

The latter issue is especially relevant in Norway, where the regulator objects to TeliaSonera and Tele2 merging, even though Ice is launching its mobile data services (the other operator is Telenor). Is this a reduction from 3 to 2 players, or from 4 to 3? Parties have until December 22 to respond.

(In Denmark, TeliaSonera and Telenor are trying to merge, reducing the market from 4 to 3 players (not counting Net 1, only TDC and Hutch 3) or from 5 to 4, depending on your view.)

PwC to telcos: focus on RoI

PwC tells telcos to focus on RoI in its new report 'Capex is king: A new playbook for telecoms execs'.

It provides a clever ranking of telcos, based on IRR and WACC. The winners, 'Value Leaders', have the highest share price CAGR & investor return. They had Capital Value turn positive during the last 3-5 years. "Investors reliably reward such behaviour with superior EBITDA multiples."

PwC's lessons for telcos:

1. Growth is gone and it’s not coming back.
2. Focusing on EBITDA and cash does not equate to focusing on value. Your investors know that already, so there is no premium multiple for directly pursuing those objectives.
3. The key to premium EBITDA multiples has been hiding in plain sight: delivering on the ROI that flows from economies of scale originally promised to investors. Welcome to capital value.

"Delivering on the capex agenda is conceptually simple, but it is not easy to implement, and it puts pressure on execs to have better answers to tough questions."

KPN Q3 ahead: results due October 28

KPN entered the quiet period leading up to the Q3 results, due October 28. Interim CFO Steven van Schilfgaarde will probably be present at the call, since he exits Nov. 1, but new CFO Jan-Kees de Jager may be introduced as well.

Focus is on the question: can KPN maintain its guidance, specifically: can it stand by its previous expectation of 'stabilisation' of consumer trends 'towards the end of 2014'?

It is based on price increases, competitor response and upselling (multiplays).

Consensus: revenue € 1.97 bn, EBITDA € 640 mln, EPS € 0.02, capex € 300 mln.

14Q2 trends:

• Consumer Mobile organic revenue improved to -9.0% but still in the same magnitude it has been since 12Q1. EBITDA has been going down rapidly in the last 4 quarters and this will probably continue for one more quarter.
• Consumer Residential organic revenue growth has been negative for 2 quarters and it looks like this could continue. EBITDA growth has been solid, but that may now drop off.

By market:

• A big issue is competition on the fixed-line market. The Ziggo/UPC merger was approved. It will be followed by ACM's decision on KPN/Reggefiber and regulation of the market until 2018. Europe is now moving toward fixed-voice deregulation, but broadband is a different matter. Vodafone appears to have found its strategy for NL: resale & unbundling. It remains to be seen what Tele2 is up to. Potentially, Vodafone could allow Tele2 access to its unbundled network. Continued unbundling may be a condition for approval of the Reggefiber deal, but then what about cable regulation? And beneath all that is the question: is unbundling good (more sales power, high-margin wholesale revenues, Vodafone not just a competitor but a partner as well) or bad (the message KPN puts forward to the regulator) for KPN?
• On the TV market the question is what the impact of Netflix is. Are consumers canceling pay-TV yet? What is happening to VOD revenues?
• On the mobile market, much depends on Tele2 and when it will launch its LTE network.

Recent news:

• John van Vianen, head of Corporate Market, to exit at the end of 2014. No new job and no successor named.
• America Movil once more reduced its stake, now by 1.2 pp to 21.4%. Above 20% they retain the right to appoint 2 members of the Supervisory Board.
• Results Tele2: not impressive. Mobile subs growth slowing. Tele2 hosts an analyst briefing December 12, presumably to launch the Dutch LTE network.
• Eurofiber was put up for sale by ite PE owner Doughty Hanson. CIF, BT and Zayo may be candidates.

Conclusions: pressure remains in the mobile market (Tele2 launch) and in the business market (Eurofiber takeover, Ziggo/UPC merger).

Newsletter All Things KPN launches on TidBitts platform

I use the TidBitts subscription platform to manage All things KPN so click Subscribe when you get to my page on their site. It is located here.

All things KPN is a new weekly newsletter, arriving each Friday: weekly assessments of everything related to KPN: strategy, M&A, financials, regulation, competition and much more.

KPN's very disappointing road to VDSL, away from FTTH

It's becoming a new reality: KPN no longer is the torchbearer of the fiber community.

This historic chain of events:

• 2008: acquires 41% of Reggeborgh's Reggefiber FTTH venture, with calls/puts for the remaining 59%. Pays in assets (its own FTTH efforts) + EUR 100m cash. Accepts regulation as part of the deal. At the time, Reggefiber Newco had just 10k HP.
• 2011: acquires other FTTH assets (mainly ISPs) from Reggeborgh and Reggefiber, alters joint venture agreement with Reggeborgh.
• 2012: raises Reggefiber stake to 51% for EUR 99m upon reaching 1m HC.
• Oct. 2013: cuts Reggefiber expansion plans to 250k HP/annum (from 350-400k). Capex per HP down to EUR 800 and falling.

The recent developments:

• Jan. 2014: to expand Reggefiber stake by 9% to 60% + consolidation & control.
• Price to be paid (as becomes clear recently) EUR 161m, i.e. at the upper end of the range (EUR 116-161m). This suggest Reggefiber's equity is valued at (at least) EUR 1.789bn.
• At this time, Reggefiber (passive network) had 1.688m HP and 547k HA. KPN (active network) does not disclose its number of HP anymore, but has 484k HA.
• When this call option is exercised, Reggeborgh may immediately exercise its put option for selling its 40% stake to KPN. At the above valuation, fair value would be EUR 716m. This suggests, that Reggeborgh will indeed exercise immediately. As a result, KPN will go to 100% of Reggefiber for a total of EUR 877m once ACM approves.

The ACM process:

• Despite the initital approval by OPTA + NMa (now ACM), going to full control (60%) once again requires ACM approval.
• ACM reportedly pushes its judgement beyond the EC's judgement on the Ziggo/UPC merger. The latter had a Oct. 17 2014 deadline, but this is pushed back for an unknown period of time. Further, ACM plans its market assessments for regulation until 2018.
• It is now questionable if ACM can delay its judgement of the full Reggefiber takeover for much longer.

Considerations for ACM:

• As with Ziggo/UPC, one might primarily expect approval. Not much changes, after all. But looking a bit deeper, reveals that changes may be coming.
• Originally, KPN acknowledged that FTTH was clearly on its roadmap, with DSL technologies (VDSL, bonding, vectoring) for the interim. Moreover, the open access Reggefiber network enables competition, both from unbundlers (ODF access) and resellers (layer 3). This is all changing now.
• Recently, KPN decided to:
• Slow down the FTTH roll-out (see above).
• Abandon the FTTH USPs (gigabit, symmetry), in order to market broadband and triple plays nationwide, independent of the access network.
• Despite the clear benefits for ARPU.
• And despite the fact that years of investments in VDSL (since 2009) haven't delivered yet. DSL net additions are still solidly negative. BB growth is clearly in FTTH.
• Move focus to VDSL. But it has clear disadvantages:
• KPN never discloses the capex cost per HP, which are not just a fraction of FTTH capex. Apparently, the true cost of VDSL could be several hundred EUR/HP. The topology is entirely different from what Reggefiber is doing, so there is no re-use of VDSL assets (including inner rings and outer rings).
• Vectoring is still largely unproven.
• Performance dropps off sharply at distances larger than 100 meters or so.
• We all know that "up to 100 Mb/s" really means: "don't expect anything better than 50 Mb/s".
• As we feared, there are now rumours of KPN switching to GPON technologies on FTTH networks. This means: a shared network (like cable and cellular), slower speeds, no open access. And yes, perhaps a few percent savings per HP.

What does all this suggest:

• Taking over Reggefiber wasn't about overbuilding with FTTH. With hindsight, is was all about taking out a dangerous newcomer.
• KPN turns out to be a copper company after all, just like incumbents in surrounding countries (Germany, Belgium, UK). The Netherlands are set to drop in international fiber rankings.
• Reggefiber was hard to push to include rural areas, imagine what KPN intends to do (hint: LTE).
• KPN appears to be steering toward a cozy duopoly with New Ziggo - each minimising capex and maximising dividends. Unbundling will become a thing of the past and resellers will be marginalised - unless ACM steps in.
• This creates opportunities for full fiber companies such as seen in the UK (B4RN, CityFibre, Gigaclear, Hyperoptic).
• Indeed, Google Fiber! It wanted to work with CityFibre in the UK, but the latter didn't want to give up its plans with Sky and TalkTalk. Google Fiber walked away and could very well be looking at the Netherlands, Belgium and Germany right now.
• Rumor has it that there is a gentlemen's agreement with Reggeborgh that precludes Reggeborgh's return to the Dutch market as a newcomer on the FTTH market. With a fresh EUR 877m it could clearly do so. Instead, Reggeborgh now focuses on Germany (Deutsche Glasfaser) and (as is rumoured) Belgium.

Shifting bargaining power in the NN debate

In the net neutrality debate, this is how bargaining power is shifting:

1. OTTs are afraid ISPs will extort money from them, hence claim strong NN regulation is needed.
2. Netflix turned this upside down and hinted at being able to charge ISPs - but added that it won't.
3. Now, Time Warner Cable appears to be afraid of being charged by OTTs.
4. Comcast came out as a defender of NN regulation.

And so:

• Everybody is in favour of weak NN.
• ISPs and OTTs both have bargaining power.

Conclusion: all regulators need to do is:

• Keep an eye on weak NN not being violated.
• Make sure peering is made free (in Google's words: it's a win-win-win not to charge for peering), as long as OTTs and ISPs do their utmost to interconnect in such a way that traffic is not hindered, i.e. OTTs deliver traffic at the ISP and ISPs add capacity when needed.

All providers are potential preys in ongoing consolidation

Consolidation is ongoing. International groups consider takeovers, as well as exits. Local companies are acquired.

Europe

The hunters:

• Telcos: DT, Orange, Telefónica, América Móvil
• Mobile: Vodafone, Hutchison, SoftBank, VimpelCom etc.
• Cable: Liberty Global

The hunted:

• Telcos: KPN, Belgacom, Swisscom, TDC, eircom, BT, PT, TI, etc.
• Mobile: Bouygues Télécom, Yoigo (TeliaSonera), etc.
• Cable: Com Hem, RCS&RDS, R Cable, Publifin/Voo (formerly Tecteo), etc.
• Challengers: FastWeb (Swisscom), Eurofiber (Doughty Hanson), Iliad

Undecided:

• Telcos: TeliaSonera, Telenor
• Other: Tele2, Altice, M7 Group

Some considerations:

• A certain required rate of return.
• Being #1 or #2 in any given market (segment).
• Owning sufficient mobile licenses and network assets (for minimal COGS, to maximise gross margins).
• Aternatively: virtual service provider (asset-light).
• Substantially increased scale and/or synergies.
• Willingness to incur start-up losses.

Netherlands

Let's look at the Netherlands as an example. There are 7 nationwide groups, consolidating to 6:

1. KPN: mostly a local telco, with a small operation in Belgium. It will receive EUR 5 bn from selling E-Plus, and a 20.5% stake in Telefónica Deutschland (worth another EUR 1.5 bn). Perhaps it finds ways to expand.
2. Tele2: among the largest holdings of the group, with a strong core/backbone network and a strong fixed-line business market presence. Tele2 NL is on the ladder of investment that is so central to the group's strategy. Still, T-Mobile could buy Tele2 NL to re-enter the fixed-line market. But as the Tele2 Group is getting out of Norway (after exiting Russia), it is becoming a takeover candidate itself.
3. Vodafone: it remains to be seen if it can build substantial presence on the fixed-line market. Takeover candidates are Tele2 and Eurofiber. Alternatively, it could partner with these companies, as well as Reggeborgh (once it gets out of Reggefiber) and CIF (which owns a string of small cable companies, which are structurally separated and overbuilt with FTTH - service provider Caiway is for sale) to create a competitor to incumbent FTTH (much like Vodafone is doing in Spain and Ireland). Alternatively, if the fixed-line market is unpenetrable Vodafone may decide to exit.
4. T-Mobile: it sold off Online.nl, making it a mobile-only provider. This doesn't sit well with DT's stance, but it could be tolerated (T-Mobile NL being billed as a 'smart attacker' - perhaps evolving into an 'un-carrier'). Otherwise, it could be a takeover candidate for Tele2, Liberty Global or a new entrant (América Móvil, Orange, Iliad, Altice). Or buy Tele2 NL.
5. Ziggo and UPC are in the process of merging, with ~92% coverage. Liberty Global may subsequently sell the merged entity if it doesn't comply with the group's goals.
6. M7 Group: controls CanalDigitaal (sat-TV) and Online.nl and is a 3P service provider on FTTH networks. Could be a takeover candidate for a group that believes in virtual service provisioning: Caiway (= CIF), Scarlet or a large MVNO group such as Lebara or Lyca.

Other companies that could be for sale:

• Cable: Delta Kabel, Rekam, Kabelnoord, Kabeltex, SKV Veendam, Edam-Volendam, Pijnacker, Waalre, Bleiswijk, Assendorp, Rozendaal, Hoogvonderen; service providers Caiway and Cbizz.
• Other: Eurofiber, Scarlet, Solcon and a long list of FTTH service providers.

Conclusion: the future is uncertain for all players, but more consolidation seems to be on its way. There are a few dead-certain predators, but even Vodafone, Liberty Global or Tele2 could turn into a prey.

DT's Niek Jan van Damme misleads over wholesale

Niek Jan van Damme, MD of Telekom Deutschland, gave his view on networks after the EC approved the E-Plus/O2 merger.

Van Damme applauds the merger, as part of ongoing consolidation, but has two objections. One is that E-Plus/O2 controls a disproportionate amount of spectrum. The other is that the new company agreed to giving access to wholesale customers at friendlier rates & conditions.

Van Damme's latter argument doesn't seem to make sense:
- Why would retail customers be better for network expansion than wholesale customers?
- Why did E-Plus/O2 agree to this?

Wholesale carries virtually no S&M costs and therefore produces much higher gross margins. Partner marketing (at the wholesale customers) extends the S&M budget of the extended group. As a result, penetration & take-up of new services potentially grow higher/quicker.

In fact, focus on wholesale-only may even yield more cash than focusing on expensive retail services. Who knows. In any case, Telefónica Deutschland appears to have much more faith in wholesale than Telekom Deutschland.

Van Damme's quote even appears to be quite misleading:

`Another problem is that these regulations give an unequivocal advantage to providers who don’t have their own network infrastructure – and that sends the wrong signal entirely. The focus of the competition authorities should not be on strengthening providers without their own infrastructure, but on promoting the network expansion. Our society is continually becoming more digitized and connected, and the necessary infrastructure to support this expansion needs to be built. Marketing existing network capacities will not be sufficient.´

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.

Social networks and privacy issues

There have been issues around privacy, in some cases involving social networks:

• Facebook buys WhatsApp, the latter denies it will share user data with the former.
• Facebook/Mark Zuckerberg claim governments are a threat to privacy (not commercial companies).
• ING plans to sell customer data to advertisers, but has backtracked.
• EE provides Asda stores with WiFi and enables tracking.

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.

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

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?

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).

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.

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.

Other issues:

• 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.

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.

Public viewing coming to a place near you?

With the Winter Olympics and the FIFA World Cup around the corner, once again the telecoms angle of mega sports events is in the spotlight. One aspect is public viewing. A Danish company (dnp denmark, through xScreen Interactive) is pushing a 100 inch full HD optical projection screen. I have seen a sample a few months ago and the picture & sound quality were very good. They are now marketing it as a (white-label) 'public viewing system'. Pay-TV operators looking to extend their market beyond households are the target customers, but anyone in the value chain could step in.

It's easy to see how this will work:

• Public spots, anywhere there are people wasting time waiting, basically, are candidates. Or eating and drinking of course (bars, restaurants, hospitals, public transport, fitness centers, sports clubs, colleges, etc.). In the Netherlands alone this is a 50k location addressable market.
• Obviously, food and drinks consumption will go up.
• Ad inserts are made possible through narrowcasting techniques.

For the venue, this looks like a one-sided business model, taking money from drinks etc. They will still have to pay a pay-TV operator (i.e. dnp/xScreen's customer) for the TV services. The pay-TV operator can of course throw in additional business services, including premium content.

Alternatively, the venue or its representative (e.g. a brewer such as InBev or Heineken, for its affiliated pubs) could buy the system directly from dnp/xScreen and charge a pay-TV operator for displaying its content. That would turn the model into a two-sided business.

In any case, for venue owners the differentiators are:

• Price. The system is much cheaper than a large plasma or LED screen.
• Quality. The quality is HD i.e. beats what you could do with a simple beamer.
• Ad inserts. The option to insert ads using narrowcasting adds value.

Submarine cables to double capacity by 2015

The sub-marine cable market grew by 2.3% or 25k kilometers during 2013, reports seim & partner. My friend Kai Seim put out a new complete submarine cable map, based on Greg Mahlknecht's data (interactive map).

You can order a print version (A0 format) via mail: info@seim-partner.de or via phone: +49 6128 609 22 69.

The data cover the period since 1989 and include all planned cables through 2016, for a total of 263 cables. In terms of capacity, the entire submarine segment more than doubled between 2009 and today, and through 2015 capacity is set to double once more.

Important new submarine cbales include:

• SAex, linking Brazil, Angola and South Africa (2013).
• SJC, linking Singapore, China and Japan (2013).
• ROTACS, linking the UK, Russia, China and Japan (2014).
• Another system linking Brazil, South Africa and Singapore (2014).
• Arctic Fibre, linking the UK, Canada, Japan (2015).

What next for satellite DTH service providers?

The telecoms sector is embracing the triple play, but broadband is emerging as the new line rental. Services can be added in a variety of ways:

• Managed services (fixed/mobile voice, SMS/MMS, TV/VOD).
• OTT (partnering with the likes of Netflix).
• Operator OTT (using new technologies such as NFV, SDN, WebRTC, HTML5).

What is there left to do for managed services companies without infrastructure, i.e. satellite TV operators such as M7 Group? They can still be resellers, but if they want more control, there are still some options left.

First, remember that they have one strength (a strong TV portfolio, lots of HD) and two weaknesses (no VOD, no BB).

Here are some options:

• Add broadband:
• Become an unbundler on FTTH (or a wholesale customer of an independent unbundler).
• Partner with an MNO for rural areas, using outdoor LTE antennas (see Cyfrowy Polsat).
• Add VOD:
• Add interactive TV and VOD using HbbTV.
• Add VOD through a Netflix-partnership.
• Add VOD using the new Smart LNB technology.
• Remain focused on TV/video:
• Launch an OTT service (like BSkyB, Sky Deutschland, ONO, etc.).
• Focus on the wholesale market to service resellers, OTT providers, cable headends etc.

UPDATE: the second VOD option requires broadband access and so a hybrid STB, just like TV Vlaanderen (part of M7 Group) is now launching.

Structural separation: great in theory (but so is communism)

Structural separation, separation of network and services, open access: it remains beautiful in theory but hard in practice.

Network and services are financially and operationally entirely different animals, but operators are simply reluctant to let go of the vertically integrated model.

• EE (UK mobile JV of DT and Orange): set off as wholesale-only, but decided to enter the retail services market.
• LightSquared (4G in the US): never got off the ground as wholesale-only provider, albeit for entirely different reasons (interference).
• Reggefiber (FTTH in NL) set out as a wholesale-only network builder with an operator and a services branch to get things off the ground. Indeed, it succeeded in selling the ISPs to KPN, but itself will be rolled into KPN as well. Effectively, it will end up being the NetCo of a vertically integrated player.
• CIF (FTTH in NL) wanted to sell its services branch Caiway to KPN, but this was prevented by the competition council. No other buyer seems on the horizon, leaving CIF a vertically integrated player as well.
• Several open access FTTH operators in the US: the incumbent shuns using their networks and small ISPs appear to have just too little weight to pull of the job. And so, Provo ends up in the hands of Google.
• Google Fiber itself promised an open access model, but this isn't happening either. Google is providing services itself.

Singapore seems to be pulling of the separation model, even though SingTel is trying to grab hold of the passive layer (which it will be required to spin off). The Australia NBN appears to be a disaster. (Who ever advised the NBN Co? Who so shamefully failed in carrying out the business plan according to plan?)

OTT providers are not to blaim - subscribers are

Breaking Views blames the Google founders for demolishing the newspaper industry. Gigaom rightfully disagrees (No, Larry Page and Sergey Brin are not to blame for the decline of the media industry): "In a similar way, many people who might normally have paid money to place a classified ad in a newspaper have chosen instead to post one for free on Craigslist. Is that Craig Newmark’s fault? Hardly. He stumbled on an opportunity — one that was also open to newspapers and other media outlets — and he pursued it. Blaming him (or Google) for their decline is like blaming Henry Ford for the decline of the buggy-whip manufacturing industry".

Ironically, NRC regularly publishes Breaking Views content. And NRC's Editor in Chief gave his views on the newspaper trouble. Peter Vandermeersch shows he understands this better than the Breaking Views analysts ("Industries come and go."), but he makes a somewhat different point: it remains to be seen if in-depth journalism (which is important for transparency in any democracy) can be taken over by online (or radio, TV) news agencies. The way newspapers covered Edward Snowden and the NSA is a case in point.

But blaming Google makes no sense. All Google does is 'provide'. Like the Division in 'Marathon Man':

When the gap gets too large between what the FBI can handle effectively and what the CIA doesn't wanna deal with, we step in.

- Who's we? - The Division.

- And my brother worked with you? - Yes.

- You're full of shit. What do you do exactly? - We provide.

- Provide what? - Anything.

In this respect, the argument made by Breaking Views resembles what some operators say when they complain about OTT providers (!) have a 'free ride' on the operators' networks. In fact, all the OTT providers do is ... provide. And subscribers are the ones to blaim. Subscribers generate traffic, not OTT providers. They prefer OTT over managed services. Just like they prefer Craigslist over newspaper classifieds.

And blaiming subscribers is obviously dumb. It shows how an industry fails to follow its subscribers as they move from one platform to another. Just like the post office, that should have been a pioneer of e-mail, instead of letting Microsoft/Hotmail and others corner that market.

Final point: there is no such thing as 'changing consumer behaviour'. Subscribers simply move from one platform (such as SMS) to another one (WhatsApp), which is much user-friendlier and more innovative.