A scenario for the Dutch boadband market, leading up to the inevitable end-game of two fiber networks

There's a fascinating development unfolding in the Dutch broadband market, characterized by a surplus of fiber infrastructure in the access networks. This situation envisions a strategic collaboration between fiber operators Delta Fiber and Open Dutch Fiber, alongside the HFC-network of VodafoneZiggo.

This proposed scenario serves multiple purposes:

1. It presents an exit opportunity for current investors, contingent upon the interest of potential new investors in this venture.
2. It aligns with the economic dynamics of the market by consolidating the number of high-speed broadband networks to just two.
3. A potential split-up of VodafoneZiggo could offer a means to alleviate its debt burden.
4. With reduced competition, the new owner(s) would be well-positioned to gradually upgrade the Ziggo HFC network to a full-fiber infrastructure over the next few years. During this transition period, VodafoneZiggo Retail (the ServCo, including the mobile network) could offer services not only over the Ziggo HFC network but also through the fiber networks of Delta and ODF.

There are potentially four networks in the Netherlands, one from VodafoneZiggo (HFC/Docsis) and the other fiber-based from KPN (4.2m lines, aiming for 6.5m), Delta Fiber (EQT/Stonepeak, 1.5m lines, aiming for 2m) and Open Dutch Fiber (KKR/DTCP, 900k lines, aiming for 2m).

Underlying dynamics:

• VodafoneZiggo is overleveraged, plans a Docsis 4.0 upgrade in due course.
• KPN will ultimately be nationwide, although rural areas remain uncertain because overbuidl is less likely. The latest overbuild plan is for Oss, where E-Fiber (Open Dutch Fiber) already finished.
• Delta Fiber's view is a hybrid market structure with reciprocal wholesale access deals (network sharing). It avoids overbuilding KPN or Open Dutch Fiber. Castricum was cancelled, since E-Fiber (Open Dutch Fiber) had a network already. It started off in white and grey areas (no Ziggo), but increasingly ventures into Ziggo-territory, where also a KPN overbuild is looming.
• Open Dutch Fiber started off in the largest cities but now does any project with sufficient scale (the latest containing just 4k premises). It avoids overbuilding KPN or Delta.

Concluding:

• Geographic fits still exist between KPN and ODF and between Ziggo and Delta.
• With each new overbuild by KPN, the value for KPN of Delta Fiber or Open Dutch Fiber decreases. If KKR/DTCP want to sell ODF to KPN, they better be quick, because KPN will not be willing to pay for any network doubling (such as Oss). This puts the negotiation powers clearly in the hands of KPN.
• If overbuild goes out of control and a sale to KPN is unsuccessful, then Delta Fiber and Open Dutch Fiber may want to hook up to create a Third Digital Infrastructure. Three national networks, however, is a challenge: low occupancy and low returns, with any of two outcomes: price increases (unlikely, if clearly necessary, in a competitive market) or a shake-out (consolidation).
• Delta/ODF could make an offer for the VodafoneZiggo cable network. This would reduce competition to basically two infrastrcutures, but being open networks. Delta has ample experience in upgrading HFC to FTTP. At the same time, a VodafoneZiggo carve-up may be the only scenario for its parents (Liberty Global, Vodafone Group) to somehow make the debt load more manageable.
• VodafoneZiggo would be split according to examples in the UK (Openrach vs. BT Retail/EE), Italy (NetCo vs. ServCo/mobile) and New Zealand (Chorus vs. Spark), where a split is made between fixed (inlc. wholesale) and mobile (incl. retail and mobile wholesale), rather than between networks and services, as is the case in Denmark (TDC NET vs. Nuuday).
• Finally: in a market that is de facto deregulated, ACM's main powers are in competition law. That may stand in the way of any deal. However, one has to acknowledge that, with a dual legacy of copper and coax, a single network (natural monopoly) is not an option for the Dutch market. Having two full fiber networks would be a luxury.

How to regulate near- or quasi-monopolies? (DEVELOPING)

Principles

• The market creates competition.
• Competition ...
• ... creates choice
• ... lowers prices
• ... stimulates innovation
• ... and good customer service.
• Complicated value chains require competition at every node, i.e. not just at the retail level. It is not enough to check only if retail prices are going up (as per Chicago school).
• Competition implies negotiating power, meaning there must be an alternative (at both the retail and wholesale markets) and not too high switching costs.
• In case the market failes: regulation.

The problem

• Highly concentrated marekt power among US internet majors, China internet majors and a few others.
• ISPs have no monopoly, but there are near-duopolies. Regulation brought switching costs down.
• Mobile site owners have no monopoly but switching costs are prohibitively high, creating a quasi-monopoly.
• Same for MNOs vs. MVNOs, but switching costs are probably manageable. However, being unregulated and data traffic continuing its high growth, MNOs will be less eager to offer wholesale deals in the first place.
• Internet platforms have near-monopolies (Google Search, Amazon e-commerce, Facebook social media) or near-duopolies (Android/iOS, Google/Facebook digital ads & news). There are alternatives (Bing, DuckDuckGo; Etsy; WT:Social), but are simply used very little.

Gatekeepers or 'structuring platforms' (2-sided businesses in red):

• ISPs and operators: varying power balance
• South Korean telcos (paid by consumers and possibly content providers) vs. Netflix et al bring up the case once more ("they are using my pipes for free") for content providers contributing to the cost of broadband access networks. Content providers have the upper hand and telcos can only win if the regulator steps in, because they have no monopoly on internet access.
• Fox Sports (paid by consumers and operators) vs. Ziggo. Polish investigation: do broadcasters abuse their market power? The content owner has a stronger position than the telco, because Fox's content is unique and Ziggo, as a TV operator, has no monopoly.

• Passive telco infrastructure owners: power is with the owners; they have an incentive to find new customers to not be getting income from a single customer
• Sale & lease-back constructions for passive infrastructure (esp. mobile sites) generate cash in the short term, but a huge lock-in and financial risk in the long term (generally after 15 years). Consider all the infrastructure deals from (cash-strapped or heavily indebted) telcos with the likes of Cellnex, InfraVia and others. The line between smart and not so smart is thin, where smart implies a sale of a minority stake (possibly through a spin-off or IPO). Cellnex may not be a monopolist, but the lock-in is huge.
• Wholesale can be a monopoly (such as KPN NL in fixed) or a near monopoly (when switching costs are prohibitively high, such as in MNOs hosting MVNOs).

• Internet platforms: quasi-monopolies (and duo-, oligo-), in need of sound negotiations
• Google and Facebook are paid by advertisers (in cash) and by consumers (in personal data). The value of the personal data is only limited by privacy regulations - which the internet companies are trying to circumvent.
• Amazon's e-commerce earns money from both consumers and third-party sellers. A clear case for chinese walls (if not bright line regulation i.e. structural separation). Apparently, Amazon is using information from its third-party sellers to support its own brands.
• Apple (vs. Epic Games) controls the iOS ecosystem through its App Store, whereas Google (esp. with Android 12) allows third-party app stores, besides its own Play Store. Apple demands a 30% fee (dropping to 15% for subscriptions after 1 year). Google's Fundo gets a 20% fee. Bandcamp charges a 15% fee.
• Amazon Channels is hardly a monopoly. CBS is a happy customer. The fee Amazon takes (if any) is not published.
• Peacock vs. Roku (paid by consumers and content providers). Peacock has its unique content (quasi monopoly). Roku is not a monopolist, but is a gatekeeper to its user base (quasi monopoly) and as such Peacock doesn't want to pass it by. Apparently, Roku demanded 30% of the ad inventory, but it's unclear how much they ended up with.
• ACCC vs. Facebook, Google: forced negatiations for the paid use of news snippets from news media (paid by consumers and possibly search engines and news sites), according to the News Media Bargaining Code. Internet services may claim fair use and directing traffic to news media, the ACCC look at it a Neighbouring Rights. The news media (supported by the regulator) thinks the internet services should pay, probably for the simple reason that they make money off of the snippets. In France, a court will decide on whether the regulator has the power to force such negotiations.

Forces

• Free market
• Abuse of market power, monopoly, duopoly.
• Allowing competitors to thrive, Prisoner's dilemma.
• Network effect (the bigger the network becomes, the easier is it to attract new users), winner-takes-all, first-mover advantage, competitor can't enter the market.
• Lack of antitrust enforcement.
• The risk of outsourcing distribution to a wholeale monopolist; theaters were split from studios.
• One-stop shop, lock-in (consumers & businesses become dependent on platform, no option to shop around, platforms set unfair ToS), high switching costs, high entry barrier.
• Peronal data portability will lower switching costs and thus entry barriers.
• Economies of scope allow easy expansion into adjacent areas.
• Two-sided business model, double hats, chinese walls, structural separation
• Fair use (content)
• Forcing a company break-up to make the parts become competitors. Case in point: Facebook's acquisition of Instagram (could have been fierce competitors). Acquisition only to be allowed if expansion cannot be realised organically. A break-up shouldn't be enforced only to destroy it.
• There appears to be a level of collusion among the platforms (Google has an unchallenged monopoly in Search, Gmail, Google Docs). But in certain areas they are challenging each other (Amazon in digital ads; Apple in maps; Google, YouTube, Facebook and Instagram in e-commerce, Facebook in gaming, Facebook in Hosting Services).
• There's a fundamental (political) choice that everybody needs to make: may my personal data be used to a. Improve the service (Google Search, recommendations), b. Enable targeted advertising. Further: Can personal data by anonimised/pseudonimised? It looks like a and b require converting back to personalised data or otherwise service improvement and targeted advertising doesn't work.
• Do the 'free' services need to be free? How much would Facebook (see it's reported ARPUs) and Google need to charge for an ad-free service? (See also price differential between tiers with and tiers without ads at VOD providers.) Without use of personal data, no personalisation or service improvement would be possible. hould platforms be forced to offer a data and/or advertiing free tier/variant? Also: are there options for consumers to NOT agree to the ToS and still use the service? There is a risk of ToS becoming some sort of private regulation.
• Platforms provide great services in exchange for personal data.It makes them as powerful as a state-within-the-state. The political issue being: is that a bad thing?

Combining Telenet/Base and VodafoneZiggo could bring the Vodafone brand to Belgium

Liberty Global has recently made some public statements about its strategy. The integration of the Dutch activities was not discussed. It must be the worry of the VodafoneZiggo joint venture. However, a scenario is conceivable in which Liberty Global pulls in the JV. That could lead to a merger with Telenet / Base, with a stock market listing to boot.

Content and network

With regard to content, Liberty Global gives preference to a large portfolio, supplemented with local content for the purpose of differentiation. Besides FTA (free-to-air) the emphasis is on sports, production and OTT. In addition, Liberty Global, believes (given a world of abundant content), in the concept of 'attention economics'. Focus is on the consumer's attention. It is important to capture it with good content, and a good interface. As for networks, the company is working on DOCSIS 3.1 and the assumption is that a connection speed of 500-750 Mb/s justifies an increase of 10 to 15 €/month. Other technologies have the attention, including 5G (for backhaul, not for the possible replacement of the local loop.

Structure

The company's structure is also getting ample attention. Latin America is split off into the LiLAC stock, while the Netherlands is a deconsolidated joint venture and Belgium has its own listing. In some countries there is a merger with a mobile operator (Belgium, Netherlands), in others an MVNO is created. The UK and Ireland merged into Virgin Media and Switzerland and Austria combined into UPC Central Europe. Combination of the Netherlands and Belgium in a new entity on paper also has benefits. There will be more scale, there may be savings in overhead and there is some synergy in the fields of content and networks. It could lead to the creation of a pan-Benelux operator.

This scenario offers some interesting additional features:

• The brand portfolio can be streamlined. In both countries, the situation is sub-optimal. Belgium has the brands Telenet and Base, the Netherlands has Ziggo and Vodafone. It could be streamlined in one clean sweep.
• In agreement with Vodafone, the Vodafone brand could be launched in Belgium. If not as the main brand, then as a mobile brand.
• The Telenet stock market listing can be maintained and VodafoneZiggo might be gobbled up. The Benelux activity as a whole would have a listing, which could offer the parent companies an exit strategy, over time. Or either of them could take full control.

Vodafone & Liberty Global extract cash from & load debt on VodafoneZiggo

Observations from the establishment of the VodafoneZiggo joint venture:

• Cash was extracted & debt was loaded by the parent companies. Future annual shareholder charges have been raised.
• Leverage a la Liberty Global (4.5-5.0), even though mobile (with structurally lower margins & growth) is a large part of the business.
• Vodafone comes first in the name & supplies the CEO, even though Ziggo is larger.
• According to rumors, T-Mobile paid €90m for Vodafone Thuis, which had negative FCF of €73m in the 12 months to 20160930 only. The JV loses 150k subs to the KPN camp (T-Mobile NL & KPN Wholesale) as a result of the sale of Vodafone Thuis. Good deal for both.
• IPO possible from 20200101, sale from 20210101. Any acquirer can save from cutting the annual shareholder charges.

A staged retreat from NL, by both Vodafone and Liberty Global, seems far from unlikely. If both agree, it can be done even before 20210101.

VodafoneZiggo established on last day of 2016 with EUR 10 billion gross debt

The Vodafone Group and Liberty Global closed the creation of their 50/50 JV on the last day of 2016, calling it VodafoneZiggo. Here are the details:

• 7.1m HP, nationwide 4G, 9.6m fixed (4.0m video, 3.1m BB, 2.5m fixed voice) + 5.2m mobile RGUs at 160930
• rev -12 mo EUR 4b, gross debt EUR 10b at 160930
• synergies NPV EUR 3.5b (unchanged; capex/opex run-rate savings EUR 210m by 2021 (reduced from 280m), Vodafone Thuis sold (FCF -73m), integration costs 280m (down from 350m due to Vodafone Thuis sale), rev synergies >= 1b)
• shareholder charges for services provided increased (EUR 182m in 2015, EUR 211m in 2017E (97 for Liberty, 114 for Vodafone))
• Vodafone to receive EUR 0.6b cash, Liberty Global to receive EUR 2.2b cash, based on recapitalisation & equalisation payment Liberty to Vodafone (EUR 0.8b, original estimate EUR 1b; down due to increased net debt at Ziggo)
• plans predictable dividend, recapitalisations, minimum cash balance, leverage 4.5-5.0
• brands Vodafone & Ziggo
• plans converged propositions
• partners retained cash from subsidiaries since 160215 (JV announcement): EUR 500m from Ziggo, EUR 300m from Vodafone NL
• not to be consolidated by parents (equity affiliate or associate)

Gross debt EUR 10 billion compares to KPN's EUR 8 billion.

Vodafone Thuis (sold to T-Mobile NL) for the 12 months to 160930:

• rev EUR 53m
• EBITDA EUR -29m
• capex EUR 44m

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.

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.

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.

Outlook 2014 for Dutch telecoms market

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

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

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

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

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

Here are the details:

Corporate:

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

Network and broadband:

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

Television:

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

Mobile:

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

Conclusions

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

Ziggo: piecing together an OTT mobile strategy

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

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

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

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

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

Dual track started for selling off Ziggo

Warburg Pincus and Cinven apparently have entered the dual track: besides shopping Ziggo to Liberty Global, they are now also looking at an IPO. The company's value could be around the rather familiar EUR 7 billion level. Liberty Global is out of cash, after buying KBW, and may be forced to sell more assets before it could turn to Ziggo.

HFC: lines are 97% fiber, but route km just 6%

Claims from the cable industry concerning the amount of fiber in their networks (97%) are realistic and unrealistic at the same time. It all depends on your perspective. If you are an end-user, the claim is defensible. If you own the network and think in terms of route kilometers, you will agree that it's not, because just 20% is fiber (source: FTTH Platform NL). In reality, this number is even worse and closer to just 6% (an informed source tells me).

End-user perspective

Cable operators in the Netherlands claim that 97% of their network is fiber. This would be the portion of the network (line) between your home and the Internet. The last mile is on average 300 meters (in the Netherlands). If the signal travels over non-fiber, this may function as a bottleneck, but over short distances like these (or 90 meters in early FTTH deployments, which were in fact FTTC) its doesn't really matter that much. In fact, in-home networking at 10 meters can be just as much as of a bottleneck.

Once this bottleneck needs to be taken out, fiber needs to be extended to let's say the home's WiFi router. And an interesting argument for this is gaining importance: the number of connected devices (directly or via WiFi) is exploding:

• Computer (desktop, laptop)
• Connected TV, hybrid STB
• Blu-ray player
• Game console
• Smartphone, iPhone
• LiveView (Sony Ericsson's new 'data pager')
• E-reader, Kindle, Nook
• iPad, notebook, tablet, netbook, smartbook, speedbook, booklet, ....
• Femtocell
• umi (Cisco's video calling box)

Network-owner perspective

Once the cable operator decides to extend fiber to each subscriber, he will realise that he will need to dig a lot more than just 3%. UPC NL (2,777,300 homes passed) and Ziggo (4,107,000 homes passed) would probably need to spend FTTH-like amounts of cash, say 800 EUR/home. That translates into EUR 2.2 billion for UPC and EUR 3.3 billion for Ziggo. Large sums for their controlling (Liberty Global owns UPC) and prospective (Ziggo's IPO may come in 2011) shareholders to reckon with.

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 to intensify cableco assault

OPTA, the Dutch NRA, has released preliminary regulatory changes for the Dutch telephony, broadband and leased line markets for the period 2009-2011. A consultation period will run from July 29 to September 8 2008. Definitive new regulation is set to be written into law before the end of this year.

1. Main findings (more detail below, under 4):

• End to fixed telephony retail price regulation for consumers. KPN can step up its competitive efforts against cable.
• Services-based competiotion on FTTC (WBA, since SDF access is not viable) and infrastructure-based competition on FTTH (ODF access). It looks like we will have a regulatory patchwork in geographical terms. MDF locations serving no less than 50% of the population will remain open. (I'm not sure if the 50% is new to the market.)
  
• Service-based competition on cable networks, but no access for KPN. I doubt if this will catch on among cash-strapped altnets or new entrants.
  
• Fixed termination will move to symmetry next year. Will KPN's charges go up or altnets' charges go down? Probably the latter, in which case the long-term benchmark for mobile termination goes down as well.
  

KPN was quick to cry victory and point out that this will help it better compete against cable (basically a two-player market: UPC, owned by Liberty Global, and Ziggo, owned by Warburg Pincus and Cinven). Let's put this into a perspective.

2. Telco/cableco convergence
Telcos and cablecos are converging in the sense that their product portfolios are starting to look like mirror images. Independent ISPs are struggling and selling out, so now incumbent telcos are increasingly taking aim at cablecos.

Let's first see how cablecos and telcos are moving toward each other:

• Both offering triple play, even though IPTV remains a complex product. On the other hand, cable lacks a mobile offering (other than cheap resale) of its own.
  
• Cablecos (and satcos) moving into the LLU market. Sky of course, now even looking at FTTC. Numericable is a wholesale LLU customer of Completel. Versatel is looking at AKF (but the Zon/Sonaecom merger is not going to happen).
• Several cablecos are considering FTTH (Cox, Wow, Videotron, Compton).
• CableLabs, the US cable association, is trying to turn Tru2way (middleware) into an interactive TV platform for both cable and telco networks.
  

3. Telco strategies against cable
Next, let's see what telcos are doing to kill the cable guy:

• In the US, AT&T, Verizon and Qwest have set up Movearoo.com. Customers moving to an area served by a different Bell are helped to remain telco customers, instead of defecting to cable.
• In the Netherlands, KPN hasn't exactly made much of secret of how much its Digitenne (DTT) product earns them: zip, or rather a negative sum (see it as a SAC). Digitenne has just one mission: pull away as many cable customers as possible.
• Thanks to OPTA, KPN can now follow competitors into targeted price reductions for fixed telephony. We can expect a price war that will erode KPN's margins further, but it will serve their priority #1: expand market share.
  

4. Main points from the new rules
Here are some more details.

• Fixed telephony consumer market: end to retail regulation (both minimum and maximum tariffs). OPTA says competition is sound, due to CPS, WLR (which will be extended to the business market) and cable telephony. However, after 2011 it expects it will be able to abolish regulation of the wholesale services (CPS and WLR) as well.
  
• Business markets: increased wholesale regulation to stimulate competition, after which the retail market may be deregulated.
  
• NGN, NGAN: KPN is moving away from MDF access to both SDF access (for FTTC networks) and ODF access (for FTTH networks) as regulated wholesale products. OPTA has decided not to demand WBA (wholesale broadband access) wherever ODF access is available, since it wants to stimulate infrastructure-based competition as much as possible. At the same time OPTA acknowledges that SDF access is not a viable platform for competition, and therefore it will demand WBA offerings in FTTC markets. In both cases, KPN will be granted a decent return, based on the EDC system (embedded direct cost), which by the way is contested by competitors. Fortunately, OPTA appears to be aware of the necessity of a long-term view (longer than the traditional 3-year regulatory review period) and regulatory certainty for FTTH investors.
  
• Broadcasting: UPC and Ziggo will have to open their networks to services-based competition, because Digitenne, IPTV and Sat-TV haven't been able to really change the cable market (in terms of market shares or prices). Third parties will be able to take over the customer relationship (but they will have to take care of the related broadcasting rights for analogue TV themselves). This is aimed at third-parties; should KPN be granted a license to resell cable TV, then it could be incentivised to delay investments in IPTV and All-IP. In other words, KPN will not be a cable reseller (just as cablocos are not allowed to be KPN resellers).
  
• All-IP: KPN is planning the closure of many MDF locations. There is an MoU with the biggest unbundlers (Tele2/Versatel, T-Mobile/Orange, BBned/TI). MDF locations covering 50% of the population will remain open for existing LLU offerings. No detailed migration deals have been signed however for the other locations. Therefore, LLU and WBA regualtion will remain in place.
• Fixed termination: OPTA will end the asymmetry (KPN charges are lower than competitors') at the start of 2009.