KPN does not treat market to visionary strategy

With the 'Strengthen - Simplify - Grow' plan, Eelco Blok furthers the strategy of his predecessor Ad Scheepbouwer. There are no big surprises. The focus remains firmly focused on the shareholder. The investment budget sees no changes and KPN will maintain a free cash flow at EUR 2.4 billion per year. A progressive dividend was announced, set to grow by EUR 0.05 per year to EUR 0.95 by 2013. At the current exchange rate, this means a dividend yield of nearly 9 percent. That, as well as the strategy and rise of Blok, is meant to bring back confidence into KPN shares, after April’s profit warning.

One important observation remains yet to be made: from 2012, payments made to shareholders - dividends plus share buybacks - cannot exceed the net profit. This implies that share buyback programmes after 2011 will be reduced from their recent levels of EUR 1 billion per year. Had this decision been taken a year earlier, only EUR 0.5 billion worth of shares would have been bought back.

KPN gave only limited financial targets. For 2012 and 2013, the operator provides only the bottom line (dividend) and so it is not entirely clear how KPN will reach that goal via sales growth, margins, EBITDA, capex and free cash flow. It is clear however that KPN will invest significantly in services, something that became noticeably necessary faced with changing consumer behaviour and competition.

Really, it is not strange that KPN shares came under pressure following the strategy announcement:

• Few concrete financial targets, only dividends;
• Share buybacks in the future may be significantly lower;
• forced to invest heavily because of competitive pressure;
• Baptiest Coopmans somewhat sidetracked;
• MVoIP pricing appear risky;
• FTTH does not get the boost it deserves;
• E-Plus is not strengthened and continues to go for a regional approach.

A number of notable issues came under the spotlight:

• Management: The Netherlands will report directly to Blok: Marco Visser for mobile and Joost Farwerck for fixed. Baptiest Coopmans seems therefore to have been put on the sidelines, but he will concentrate on the quality issue and therefore become responsible for the announced cost savings, jobs reductions, outsourcing and offshoring. He will remain a member of the board of directors.
• Mobile Netherlands: the number of shops will be upped and KPN will deploy quad play. The pricing of mobile data will centre around bundles, which will include different services. MVoIP (mobile VoIP) will be allowed but not for free. MVoIP may be allowed only in the more expensive bundles, which begs the question: how will KPN expects manage this? (see our commentary 'KPN, Belgacom, T-Mobile respond differently to the OTT threat'). There will be bundles for certain types of applications such as MVoIP, and not for specific apps such as Skype or WhatsApp.
• E-Plus: emphasis is put on the fact that Germany can continue on its own steam, supported by a regional approach. Uncertainties remain: does E-Plus have only a future as a provider of services in Cologne and Munich (so to speak)? Telefonica said earlier that LTE was a 'three-player market' (see our background article 'Is KPN's strategy following Telefonica?'). The question remains whether E-Plus will in the long term be able to remain independent.
• Getronics: will be integrated into KPN business and "re-branded" to KPN. It will concentrate on the Netherlands and Belgium where it must become a 'leading' player, which effectively means that it will be strengthened through acquisitions. A striking detail is the announcement that there will be a new brand name for the SOHO/SMB market.
• Mobile International, RoW (rest of world): KPN France and KPN Spain are being reconsidered - a migration of these loss-making activities (see again our background article 'Is KPN's strategy following Telefonica?') to Ortel is the obvious next step. Ortel must show "significant" growth: a doubling of sales.
• iBasis will remain in the portfolio, despite low returns.
• M&A. The activities of Getronics outside the Benelux and the MVNOs in Spain and France are more or less now on sale. On the other hand, KPN has to grow in the ICT market in the Benelux and on the Dutch broadband market, which could happen via acquisitions.
• FTTH: XS4All and Telfort will become active on Reggefiber’s network. That will give an additional boost to KPN’s already rising FTTH market share. Block reiterated that FTTH rollout will not be accelerated. It is known that FTTH customers will be switched to fibre but how exactly is not clear. Questions arise: is it wise to choose for VDSL? Is KPN running behind the times? Choosing for an acceleration of FTTH would have certainly shown more courage and vision.
• VDSL: outwardly no distinction is made between VDSL from the local exchange (VDSL-CO) and VDSL from the street cabinet (FTTC). For marketing this is a good thing, but the performance of the xDSL network will thereby exhibit a large variability. Hopefully, KPN will with a postcode check enable customers to get a realistic idea of what they can expect in terms of speeds.
• Regional approach: this upgrading approach will rule not only in KPN’s mobile operations in Germany and Belgium, but also in the Dutch fixed network. That's a nice ‘lesson learned’ from how operations are conducted in the neighbouring countries of the Netherlands.

In conclusion: KPN does fill in a number of previously blank spots with its new strategy. An unfortunate combination of circumstances has made the appointment of Eelco Blok come together with a sudden sharp rise in VoIP and chat over mobile. However, KPN attributes the decline in income largely to the loss of revenue from out-of-bundle calls and SMS. For subscribers, this is not the nicest approach, and this has undoubtedly contributed to KPN’s poor reputation (and that of all other telecom companies). The blame can be compared to the loss of 'late fees' at video stores. It is therefore good that KPN is now looking for a 'nicer' way of pricing, an approach that is being, for example, actively put forward by Vodafone MVNO Hollands Nieuwe. KPN’s unsympathetic pricing methods is really at the root of its problems, which could explain why T-Mobile and Vodafone, with their more customer-friendly tariff systems, have experienced fewer problems with MVoIP and chat.

One also has to wonder how certain apps can be blocked. Will KPN manage to move MVoIP users to special subscriptions? If KPN can come out with a good set of proposals, then it is likely that satisfaction and the NPS (Net Promoter Score) will increase. KPN must then be willing to structurally earn less from these customers, who in the last months have become used to lower bills. If KPN manages to treasure these currently very satisfied customers, it will be able to "upsell" new services. This would do much for KPN’s goal of raising RGU per households to 2.4 from 1.8. But if KPN tries too hard to push these customers towards past ARPU rates, dissatisfaction could grow - with an obvious impact on the NPS.

Finally, it is something that KPN talks only about MVoIP rates and not about mobile chat (such as with WhatsApp) prices. Apparently, the company is resigned to the fact that chat has become the new standard for exchanging short text messages.