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.

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.

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.

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?)

MPJC: no visionaries

Last Thursday was the annual Mediapark Jaarcongres (MPJC) of the public broadcasting sector in the Netherlands. Not quite as interesting as last year's edition, but well worthwhile. No real visionaries, apart from the 4K contribution, but that was done last year as well. Here are a few common themes.

Trends

It was all about:

- Smartphones, tablets, touch screen, swiping

- Connected TV, TV everywhere, second screen

- Social media and social TV

- Consumer is in control

i.e. nothing really new.

Hybrid TV

UPC and others pointed out that there still is very little true integration of broadcast and broadband, despite all the connected TVs. We have come to the same conclusion (report available at 50% discount for readers of this blog), which is well worth stating explicitly, because the term 'interactivity' is used much to easily for functions that aren't really worth it. Such as pausing live TV - nothing more than a very basic feature exploring the two-way connection of an 'interactive' TV. There is still a lot to be done.

Kevin Slavin

Excellent talk from Kevin Slavin of Starling TV and Area/Code about the role of the audience. From the laffbox (LFN: laugh from nowhere - check out this) to Facebook/Twitter, parasocial relationships, the audience becoming a character (see Brand Fiction Factory), a character as the audience and finally Everyware (... is where the laughter comes from): social media replace the laugh track.

Twitters problems: hashtags are not unified; there are simply too many tweets.

RTL, Sanoma

Both are pusuing a strategy of 'follow the consumer' - not surprising.

Sanoma NL (revenues: EUR 500m) took some effort defending its takeover of SBS (3 TV channels, program guide) for EUR 1.2bn (shared with Talpa). The problem is not so much SBS's current underperformance (that's simply due to a 'cycle'), the real problem is that this is essentially a change of control where the acquirer has no clue how to run a TV company. Talpa (TV productions) is included in the deal, taking a 33% share, but they don't know how to run a company like SBS either. Which is why they will have a very hard time realising synergies.

UPC

Solid statements: Google lacks a unifying UI across all devices; social TV is still embryonic. No news on the Horizon box (see page 5 of this journal: trial coming to the Netherlands in July, commercial launch September).

Glashart Media (Reggefiber)

Reggefiber has ~700k homes passed and ~200k homes activated (for more details on the Dutch FTTH market: our FTTH NL 2011 report will be out next week - here is last years' edition). Glashart Media services 130k TV homes, of which 45k use interactive services.

Its claimed USPs: picture and sound quality; number of channels; EPG (providing access to apps); 3-D ready; content (local TV, VOD, catch-up TV, Eredivisie Live). OTT services are drawn into the managed services domain, while providing open access to all content parties (0900-TV).

2010 Was the year of 'fix the basics', 2011 is the year of 'boost the base'. A new box will be launched, allowing 3 TV sets to be connected and with a 250 GB hard disk optional. They also want to experiment with a kind of prepaid card, giving access to certain content for a limited time. Intriguing plan: an off-footprint break-out is coming, i.e. Glashart Media providing TV services outside the Reggefiber footprint.

NOS

Launch of the new site m.nos.nl/video.

NLbuzz

Some stats on Eredivisie Live: 550k subscribers, 1m unique visitors/month, 1.5m views/month, 300k live streams/year. A new site will be launched at the end of June 2011, relying completely on adaptive streaming. It will offer a single-sign-on (across devices). They see an interest in niche content, such a waterpolotv.nl (just 30k active sportsmen, but no fewer than 28-30k views per video).

TNO/Waag Society

Wonderful demo of 4K, which is predicted to come to market in 2011. What it claims to be is an even sharper image, creating the illusion of 'really being part of it'. But 4K also offer a more dynamic picture and a much better opportunity to zoom in. Japan expects 8K by 2020. SD (720x576) implies 0.4 megapixels, HD (1920/1080) implies 2 mp, 4K (4096x2160) goes to 8.8 mp and 8K to 33 mp. And then you can combine 4K (or 8K) with 3-D. Bandwidth consequences are apparent.

Public Broadcasting

The day started off with the PO (public broadcasting) commenting on government plans to reduce support by EUR 127m. This number is supported by a recent BCG report. Broadcasters (essentially production companies) will be forced to merge to reduce the field to 8 players, from 21 currently. (According to the PO, this will supply only 30% of the targeted savings and the plans will force 20% lay-offs.)

Fiber wars in the Netherlands

The town of Heeze-Leende is now planning a cooperative-owned FTTH network, for fear that Reggefiber/KPN would skip farms and other rural locations. In other towns, things have gone rather more hostile:

• Eersel: similar situation as in Heeze-Leende, except that Reggefiber has already begun assessing demand. Opponent is the Buurtcomite Glasvezel Eersel.
• Vught: again, a similar situation. Reggefiber is in the process of assessing demand, while Glasvezelvught.nu (owned by entrepreneur Jan Schuurmans) is starting to roll-out on its own.
• Harderwijk: the local cable company, CAI Harderwijk, has stated that it will replace its network with FTTH, but not all too soon. It will be a very gradual process. In the meantime, CIF (Communication Infrastructure Fund, run by Bouwfonds with around EUR 1 billion from several pension funds) has apparently knocked on its door, but the city doesn't want to sell. Now CIF is threatening to start rolling out FTTH on its own.

In this order, these are increasingly aggressive tactics to bring fiber to a town. Harderwijk especially could turn into a bloody mess, because who could wish to duplicate a network?

Will Reggefiber give in and blanket entire municipalities, including rural areas? Will CAI Harderwijk give in and sell to CIF? Will CIF revert to buying other cable assets (such as Delta Kabel, Cogas Kabel, Rekam, etc.)? Will it be forced to shop abroad? Is the time getting ripe for coops to enter the market?

Acquisition targets in the Netherlands

It's deal time. And what could that mean for the Netherlands? A short summary:

• International operators could do a little portfolio management and decide they don't need an NL asset: Deutsche Telekom (perhaps increasingly likely now), Liberty Global, Vodafone and most of all Tele2, which requires from its operations an ability to be a Top 2 (hence the name) player. Of course business providers such as BT, Verizon, AT&T, Orange are in a different game, as are Colt, Easynet (private equity owned).
• Private equity investments: Ziggo (possibly heading for an IPO) and CanalDigitaal (could be attractive to any challenger on the TV market: KPN, Tele2, possibly T-Mobile or Vodafone).
• Cable providers: CIF focuses on passive network assets, but has a majority stake in CAIW. How about an IPO for this multi-MSO service provider? And then there are 20+ MSOs, in which CIF is presumably interested, but Ziggo and UPC as well. And perhaps even Reggefiber.
• Fiber assets: OBR (Rotterdam) and LomboXnet (Utrecht) could be targets for Reggefiber or CIF. Reggefiber itself has only one way to go: to KPN.
• Other: Scarlet (owned by Belgacom), Solcon (privately owned) and a long list of newcomers on the FTTH market.

KPN, the hoovering company, is a little unclear in its strategy right now. Under CEO Ad Scheepbouwer it has acquired someting like 40 companies (most importantly: Telfort, Getronics, Tiscali NL, iBasis). Recently, focus was moved from ISPs to MVNOs, but also Atlantic Telecom (business services) and NL-ix (Internet exchange). In the meantime, several assets were sold: fiber and business in Belgium, fiber in Germany, towers in the Netherlands. All quite helpful in reaching the free cash flow target.

So what could be next for KPN:

• Sell E-Plus and Base, by the same logic that DT sells T-Mobile USA: there is a step change coming for the roll-out of LTE.
• Sell more passive network assets. CIF is dying to buy them.
• Sell Getronics. Sort of a u-turn, but perhaps focus is moving to network assets (but not passive assets).
• Buy WiFi assets.
• Buy more MVNOs, esp. those focused on the business market.
• Buy CanalDigitaal (see above).
• Buy out Reggeborgh from Reggefiber.

To round off: one type of asset is out of reach of KPN: cooperatives. This could be the way forward on the FTTH market, but in light of the above (NL-ix), it implies that Ams-IX may be a desirable target, but cannot be folded into KPN.

KPN: forward-integrated network or backward-integrated marketing?

Talking to a friend on the 'telecoms debt' side of the market, a relation between sewer-based FTTH and open access appeared.

There are two assumptions:

• Telcos have a tendency or desire to become as vertically integrated as they possibly can.
• There are basically two kinds of telcos: those focusing on networks, and those focusing on services.

Telcos focusing on networks start off by building passive networks. They then do forward integration, by adding active elements and finally may even end up providing services. Example: Reggefiber.

The other kind look at themselves as sales & marketing organisations. They do backward integration by adding active network elements (for control, higher margins) and may end up building passive networks, if the cost thereof is low enough. Example: Tele2. But in a way too: KPN.

The latter point (cost of passive networks) is precisely where sewer-based networks come into play. There's a start-up in the Netherlands that claims it can cut the cost of laying fibre in half. So my friend said: if they could somehow cut the cost in half yet again, building FTTH would become so cheap as to be justified by any sales & marketing driven telco. As a result, open networks would become a thing of the past. Obviously, the sewer poses some tough challenges, so it remains to be seen if this start-up will fly and build its own vertically integrated telco on top of its sewer-based network.

The other interesting question raised by this discussion is: what will Eelco Blok's new strategy be? He is taking over as KPN's CEO later this year, and the question he might want to answer is very fundamental: is KPN a netwok company, with forward integration, or a sales & marketing company with backward integration?

Reggefiber lauches 200/200 Mbps in Zeewolde

For our Dutch readers: Reggefiber's Gaby ter Keurs on the launch of the Zeewolde network (penetration 70%) offering 200/200 Mbps. Total subs 150k.

Reggefiber's new CHQ

The new corporate headquarters of Reggefiber, located in Rijssen, made to resemble a fibre-optic cable cross-section. The company is named after a small river, the Regge, which flows nearby.

EIB publishes Reggefiber's application for funding

KPN nor Reggefiber are publishing the news, but the EIB decided to put Reggefiber's application for a EUR 130m loan on its website. Not an excessive sum, but enough to keep Reggefiber rolling and satisfy KPN's October 27 'ultimatum'.

FTTH is coming to Leeuwarden

Reggefiber will start digging for a citywide FTTH network in the town of Leeuwarden any day (depending on the weather). Over 700 km and 38,500 locations (the town's site says 49k) to be hooked up in 2 years time. Not sure if it's the city (93.3k pops) or the entire municipality (94.2k pops). There's more on the Glashart (= commercial name of Reggefiber) site. Service providers haven't been announced yet. The local cableco is UPC.

Check out an introduction (in Dutch):

Will KPN pull out a wild card?

It's the time of year to make predictions. On December 15, KPN is set to clarify its FTTx Roadmap, but it doesn't look like there will be any fireworks. Here are a few possible outcomes that don't seem to be on anybody's cards:

• MAYBE they will accelarete FTTH. That would be a u-turn to previous statements, and construction capacity (currently at an annual run rate of 250k homes per annum) doesn't have much room to grow.
• MAYBE they will bet the farm on VDSL2. It is what they have announced, but it could be more than just an interim strategy (in theory).
• MAYBE have an acquisition to report. BBned is for sale and would add a handsome business provider (the wholesale provider would lose all its customers no doubt, and the retail business may have to be sold on). Still, they could replace BBned on a couple of FTTH networks.
• MAYBE they have a retail partnership to report. Perhaps Online Breedband is finally ready to live up to its promises (made in April). Or Tele2. But the real big fish would be Ziggo. Imagine Ziggo becoming an operator/RSP on the Reggefiber FTTH networks! (UPC would be a harder nut to crack - they suffer from a severe case of incumbofobia).
• MAYBE they have a content deal up their sleeve. Connected TV is all the rage. This would enhance the triple play.

UPDATE But the biggest surprise would be:

• MAYBE there will be a switch to GPON technology (in the larger cities), in order to be able to re-use VDSL investments.

KPN may move beyond FTTH

Last week, I spoke with a couple of Ericsson people. They had a really cool slide of how market shares have moved for all vendors (Ericsson, NSN, Alcatel-Lucent, Huawei, ZTE, NEC, Cisco, Motorola, Nortel). The X and Y axis represented mobile and fixed sales. Each company was represented by three blobs, representing sales in 2006, 2007 and 2008. By their size and direction, one could tell who is moving where. Curiously, Cisco was regarded purely fixed (not counting the Starent takeover) and in LTE, Ericsson expects to see three winners: Ericsson, Huawei and some third party (I wonder who that could be).

When it came to LTE, they were perfectly clear about what it means: it is the third pipe that we have been talking about for a long time (but not recently). In Ericsson speak, mobile broadband (MBB) is not a complement, but a fully-fledged replacement to fixed NGA networks (helped by releases such as these: 500 Mbps, even if we should not get carried away). And make no mistake: we are talking laptop (or netbook) usage, not an inferior smartphone experience. Of course, MBB requires FTTS (site).

All this may be a blissing to KPN's indecisiveness regarding FTTC and FTTH.

On the side, new service development is notoriously slow, which may contribute to KPN's undecisiveness. One reason is (semi) governmental agencies' unwillingness to move online. A reason behind this, as was stressed in my newspaper this week, is the fact that health workers are paid by the hour. They are completely disincentivised to embrace e-health, because it threatens to make their work much more efficient.

Back to KPN. They bought a 41% stake in the FTTH start-up Reggefiber, and injected their own (few) FTTH projects into it. And now they are trialling both FTTH (through Reggefiber) and FTTC. By the end of the year, they want to decide their strategy going forward, based on these trials. (The Q3 release is due October 27.)

My prediction is: they will freeze the Reggefiber expansion (blaiming it on the financial markets) and move forward with FTTC. And this may be a smart move after all. The original FTTC targets were to bring fiber to 28k street cabinets. And perhaps some of these can also house LTE gear. At the same time, KPN's mobile sites will have to be fiberised as well (it is a well guarded secret how many actually already are).

It also becomes clear why KPN bought the Reggefiber stake: for the good old business reason of taking out a competitor. Remember Nielsen Media Research, once part of VNU, following the exact same strategy by buying start-ups that threatened Nielsen's monopoly on the US TV ratings market. They were never heard of again.

As a result, KPN may be the first operator in the world to actually move beyond FTTH. (So much for those who like to term FTTH not NGA but LGA: last-generation access.)

Service innnovation on FTTH: institutions need help migrating online

Today I visited the Glasdag 2009 conference put together by Glasvezel.nu (the website devoted to community and other efforts towards FTTH in the Netherlands) and SBNA (the non-profit behind a number of such initiatives in the city of Amersfoort). The conference was aimed at volunteers interested in launching FTTH initiatives in their home towns. Speakers included Kees Rovers (the driving force behind the Nuenen and Eindhoven FTTH networks built by OnsNet) and Jan Griffioen (Reggefiber).

The conference was opened by an Amersfoort city council member, who hailed the social and economic benefits of these networks. He also hinted at the 'option value', quoting history: when the telephone was first invented, its main purpose was to inform people that a telegram was on its way.

Kees Rovers first gave his 7 key elements to successful network deployment:

1. Business case. Make sure you have one, including funding. A high take rate is essential. Remember that fiber is cheap; it costs only EUR 1,000, which is negligible when compared to your home's value.
2. Community sense. Everybody needs to be in.
3. Triple play. This will make the network finance itself.
4. Communication. Forget fiber speak. Keep that 75 year old granny in mind when talking about your plans. Focus on telephone and television services.
5. Local services. This is something the cableco can't replicate. Think of the local soccer club, even marriages taking place in the local church.
6. Customer service. Remember that people hate call centers.
7. Reliable network.

Jan Griffioen outlined Reggefiber's long-term strategy. Connecting every Dutch home in the next 10-15 years is core to that strategy. The consumer-facing brand is Glashart. Today, he was able to add one more network to Reggefiber current c. 35 projects: the Kattenbroek area in Amersfoort.

A few things stood out. First, if any demographic needs to converted to the Fiber Religion, it's .... women. It was practically a men-only conference.

Second, Kees Rovers conspicuously de-emphasised fiber in order to put services in the spotlight. This is all fine and dandy, but it must be kept in mind that he is now involved with KPN's 2x5 trial towns, and that half of these are around VDSL, not FTTH. But obviously, on the whole he is quite right. If the end-user is to be converted (remember: a high take-up rate is needed for the business model to work), then it must be basic and understandable services to convince them to sign up. Many city workers and departments come to mind here: doctors, soccer clubs, church, library, school, hospitals, local broadcasters, city hall, etc.

What really stood out was that all these grassroots initiatives really appear to grasp this issue. But was even more striking, was Kees Rover's observation on how to get it done. Don't count on any organisation here to take care of this issue and migrate their services online themselves. It will never happen this way. That's just not how people are. They need to be forced, one way or another.

One final word: this movement is behind taking a lot of traffic off the internet. It's all local traffic. It has been reported before that local traffic can make up as much as 50% of traffic on FTTH networks.

FTTH snippets from around the world

Several FTTH related news items caught the eye over the past few days. More about the Dutch market in the next few days/weeks, rumour has it. For your diary: Singapore is set to decide on the OpCo of its NGNBN within the next few days; Australia is to pick the winners of its NBN RfP.

• Green: Verizon FiOS uses just 38% of the energy that its copper network uses.
• SMP. The proposed KPN/Reggefiber joint venture in the Netherlands is drawing criticism. Both cable operators and unbundlers are preparing legal action. One can only guess what it's about, but I suspect the wholesale tariffs for access to the passive infrastructure are way too high and will be contested.
• Open access. Bell Canada is fighting it, Ziggo is denying the business case (he prefers a duopoly) for it and TDC Cable will have to allow unbundlers onto its network. The latter case will be interesting to follow, to see if this technically and commercially works.
  
• Cable. Kabel Noord, a small MSO (23k subs) in the Netherlands is embracing FTTH for new builds and fully acknowledges the benefits (bandwidth, symmetrical, not just VoD but TVoD as well).
• Munifiber. Alas, the Palo Alto project fell through. First, Axia's financier quit, and then (when Axia asked the city to pony up the money) Axia itself hung up.
• M&A. Telefonica supposedly is close to a deal to buy both Hansenet and United Internet. It will be interesting to see how they will fight an incumbent that is equally conservative as the Spanish mothership.
• In-building. Ericsson has demo'd 500 Mb/s over 500 meters, using 6 bonded pairs. Sounds a lot like solving the in-building problem (for a much faster roll-out).
• Services. Anderson (Indiana) is contributing a service, as part of the answer to the question: do we need all that bandwidth. It's called storage.

I will be meeting a bunch of fiber people over the next few days, from OBR (munifiber Rotterdam), Reggefiber and PacketFront, so keep posted.

Open access: If you can't beat them, join them

Paul Budde has the 'official' news: Sol Trujillo is out at Telstra. Another big win for the open access movement - hopefully (it remains to be seen who will replace him).
Paul rightfully refers to KPN's open access strategy, but let's not forget that it was not just NGN thinking that forced it upon them. KPN must have felt pressured by the loss of fixed lines (down 50% to 2.5m in just 3 years), heavy competition from cablecos (who have near 100% coverage), and last but not least: Reggefiber's stealth advance in the markt. In FTTH towns such as Nuenen, cable and KPN are almost extinct.

Some thoughts on KPN's vertical integration

Amsterdam finally published the Phase 2 plans, with the KPN/Reggefiber joint-venture, for its munifiber Citynet network. Phase 1 included 43k homes. Some notes:

• No timescale for the 100k homes, let alone the final 250k ones.
• I asked Ad Scheepbouwer about his views on KPN's stake in the passive layer. It has an option to acquire a majority in the Reggefiber joint-venture, but it could also allow it to dilute by raising third-party funding and ultimately get out of the infrastructure business altogether. Alas, Ad keeps his options open at this time. Reggefiber, for that matter, has no ambitions whatsoever to become a service provider (they do have a stake in the XMS joint venture with BBned).
• I liked mayor Job Cohen's referral to earlier PPP projects: the Amsterdam banking industry (400 years ago), the North Sea - Amsterdam channel, Schiphol airport and the wildly interesting AMS-IX.

KPN will also be operating the active layer (BBned is the active operator on the Phase 1 section), and be service provider as well. In other words, it will be a vertically integrated operator/provider once more. No exclusivity in the active layer, though (which BBned has). Some more notes:

• It remains to be seen if it works. The regulator should monitor KPN's actions (pricing) very closely.
  
• Will only SPs compete, or will there be alternative active operators as well? In the Phase 1 areas, competition is limited to SPs, because of BBned's exclusivity. However, the number has gone down drastically, and two (Alice and InterNLnet) are owned by BBned itself. Is there no interest in competing in the services layer only?
• Competing in the active layer is a lot more expensive, but I believe this is equivalent to LLU investments in the DSL world (cutting out the wholesale payments to KPN to improve the business case). This implies two things: 1. You need scale. 2. Since FTTH is the end game, there is no risk of becoming obsolote (which has happened to LLU operators, who were subsequently hoovered up by KPN). In other words: a new entrant, operating the active layer (and bringing its own SP) could alter the Dutch landscape dramatically. I see a big opportunity for other incumbents to first buy BBned (it's for sale!) and then expand.
  
• Obviously, some things stand in the way of operators expanding into the Netherlands: 1. The global financial crisis, 2. focus on expansion into emerging markets.
• Still, there is also a case for European incumbents to enter the Netherlands as service providers only: find some extra growth from an infrastructure-light approach, get experienced in an open access FTTH environment, hurt your competitor (KPN), etc. Now, of course you would ideally need a good brand name to make such a move. KPN is expanding Simyo (its MVNO) across Europe, which could serve as a mobile equivalent. How about Skype (it seems to be for sale ...)? It could be used as a vehicle for any incumbent and subsequently be enhanced with new products, turn it into a pan-European SP (and next get into the active layer).
  

Mysteries around KPN's FTTH trials disolved

Here's a short follow-up to some questions around KPN's success in an early FTTH deployment, mentioned in my previous post.

• ARPU = EUR 58 seemed low relative to the 65, 80 and 110 triple play packages KPN offers. The answer to the mystery is embarrassingly simple: ARPU numbers exclude VAT.
• 2x5 towns refers not only to 5 FTTH projects, but to 5 FTTC (+ VDSL) trial projects as well, as mentioned in the Q3 report. I'm quite confident that KPN won't go with FTTC.
• 16% penetration refers to the number of activated homes as a percentage of the homes connected (which is a number not much below the homes passed number). Here it becomes apparent that KPN has a much easier up-sell than Reggefiber. KPN can simply offer a migration with very little risk of service interruption. Reggefiber, as a stand-alone unit, has to compete with existing offerings from KPN and cable. Hence, Reggefiber's strategy to assure itself of some 40% sign-ups in advance.
  

KPN and OPTA are negotiating a deal

My son takes swimming lessons, and I discovered there is something distinctly fishy about it. It has all to do with perverse incentives: the teachers have no interest in making him go through the course in the shortest possible time. That would only endanger their jobs.

No, this story will not lead to the GFC (global financial crisis), but to telecoms regulators. They too are perversely incentivised. They have no interest in deregulation, because it will make them lose their jobs.

I had an interesting email conversation with a highly valued reader on the upcoming regulation (tariff proposal December 19) of the planned KPN/Reggefiber FTTH network. Turns out, political issues and sensitivities are all over the current negotiations between KPN, Reggefiber, OPTA (the Dutch NRA) and NMa (the Dutch competition commission). I have no such sensitivities at all - for that I beg your forgiveness.

Here are the wants & needs of the main parties involved:

KPN:

• First, it wants the joint venture with Reggefiber (Reggefiber FttH, AKA Glashart) approved by NMa. This is expected before the end of the year.
  
• It starts off with a minority interest for KPN, in order to get the whole thing unregulated, or at worst, under NMa's jurisdiction.
• In due course however, KPN wants to exercise its call option to turn its stake into a majority shareholding.
  
• They want to fiber up the country. Multiple sources tell me that KPN suffers a slight (read: severe) form of panic over competition from the Dutch cablecos (Warburg/Cinven's Ziggo and Liberty Global's UPC, mainly), which have near nationwide coverage. FTTH is just one way to stop the bleeding. Beefing up the TV activities is another. Also, they are heavily lobbying for open access to cable networks - which is not going to help (cablecos cannot resell voice on the KPN network, and KPN cannot resell TV on the cable networks; they are supposed to invest in infrastructure and launch their own copycat service, in order to create intermodal competition - this is OPTA policy).
  

OPTA:

• It wants to stay in business. Losing regulation of the FTTH market would put it out of business for a large part.
• It wants to remain independent, not be part of NMa, a political topic.
• Instead, it wants to merge with the Commissariaat voor de Media, the Dutch media authority, to form an Ofcom or FCC of sorts (but without the spectrum jurisdiction, which resides at yet another agency, the Agentschap Telecom).
• On its part, OPTA cannot afford to block progress and Keynes style investments. We are talkings billions of euros here, and a big impact on the economy.
  

There are also cross-sensitivities:

• OPTA can hurt KPN by delaying its decision making. Not a very complicated task for a government agency. See above: KPN wants to move fast in order to stop the bleeding.
  
• KPN can put OPTA partly out of business by staying under the radar (by having a minority interest in the joint venture). The minority interest would imply that the entire access network wouldn't be regulated anymore. This would have huge Europe-wide consequences, which is why the proposed Reggefiber deal is tracked in every telco boardroom and NRA agency in Europe.
  

So, what do you get when you put all these wonderful ingredients together? Answer: a politically negotiated deal:

• OPTA assigns Reggefiber FttH SMP (significant market power), which is legally highly contestable, in order to be able to regulate it.
• KPN accepts this, in order to get NMa approval (for which OPTA gives input, which in itself is legally contestable too). KPN also wants OPTA to copy/paste the Reggefiber business model to arrive at the proposed wholesale prices and caps.
• The call option plays a crucial role. It implies that GNA (Amsterdam) and AFC (Almere) may remain outside the joint venture, because KPN/Reggefiber only has a minority stake.
  

One last word. In case you were wondering how OPTA came up with the EUR 2,50 additition to Reggefiber's line rental price to arrive at the proposed wholesale caps: there was no financial modelling involved. Just politics.