ACM report suggests KPN misinformed shareholders on costs of pair bonding

Friday 16 June 2017 | 11:43 CET | Background

The double face of incumbent operators was illustrated recently in a consultation published by the Dutch regulator ACM. A company like KPN faces on the one hand the requirements of the regulator and on the other the demands of its shareholders. This leads sometimes to confused communication, and the ACM suggests KPN may have informed its shareholders incorrectly in this case. 

Double the speed with pair bonding 

The subject in question is pair bonding, or bonding two or more copper lines. This option is available to KPN (perhaps more than any other incumbent), and the company has stated that it should allow for a doubling in internet speeds. This brings the top speed over VDSL2 to 100 Mbps, in combination with vectoring to 240 Mbps and with Vplus technology to 400 Mbps (for more info, see slide 34 in KPN's Q1 results presentation).

As a side note: KPN makes handy use of this in its marketing by using at the same time fibre speeds (up to 1 Gbps). Where pair bonding is applied, KPN claims that speeds "from" 100 Mbps are available, while in practice it's speeds "up to" 100 Mbps (or 240 Mbps with vectoring, 400 Mbps with Vplus).

ACM: costs incorrect

Back to pair bonding. A doubling in speed is nice, and an important reason for KPN to slow its FTTH roll-out to the bare minimum (for more on this, see our new Dutch FTTH rapport). But what about the costs? At its Capital Markets Day in 2016, KPN told investors that pair bonding would result in costs of EUR 50 per line (see slide 59 in the presentation). In the ACM's consultation, the regulator states plainly that the cost-price reporting shows that the costs of such a connection are higher. The ACM is ignoring KPN's documents from the CMD 2016 and basing its view only on the cost-price reporting.

The problem is that pair bonding can't be applied directly on all KPN's lines. The physical implementation is sometimes difficult, leading to additional digging and technical work. In such cases the costs of pair bonding can reach EUR 650 per line. According to market rumours, the average cost would then be closer to EUR 300 per line, rather than EUR 50.

Pair bonding vs. FTTH

Are shareholders getting this message? At the moment, KPN has a fairly tight leverage, with net debt at 2.7x EBITDA. This is tempered somewhat by its remaining stake of 15.5 percent in in Telefonica Deutschland. The costs for upgrading its network implicitly play a role in this. The shift from FTTH to FTTC is expected to reduce the investment budget (capex) significantly. However, if KPN plans to roll out pair bonding on a broad scale, it begs the question whether FTTH might not be a better choice. The approach may differ, with FTTH for larger areas and pair bonding in individual cases, but with costs of EUR 650 per line, and not much more than FTTH, the question needs to be asked. 

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