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.