Dutch open cable proposal promising - unless market backs KPN and ACM holds out for FTTH

Wednesday 28 February 2018 | 11:57 CET | Background

Dutch regulator ACM has released a draft analysis for the fixed broadband market, designating both KPN and VodafoneZiggo dominant players for the first time. If approved, the decision would see both copper and cable networks subject to access regulation for the three years to 2021. KPN immediately offered an alternative: its VULA deals agreed with alternative operators in 2015 would be extended to fibre and for another seven years. The ACM would still have oversight over the tariffs negotiated on a commercial basis. If KPN is able to secure the VULA deals and convince the ACM that regulatory chaos would hold back FTTH expansion, the incumbent has a chance. If not, it appears the ACM is well-prepared to avoid any backlash from Brussels. 

The relevant market under discussion is wholesale fixed access, covering copper and fibre networks at KPN and cable at VodafoneZiggo. The proposal includes (virtual) unbundling of copper and fibre, as well as wholesale broadband access to copper, fibre and cable. The ACM found that both KPN and VodafoneZiggo have significant market power ('joint dominance'), meaning both will be subject to ex ante regulation for the next three years. 

The ACM conducted an extensive analysis, with the help of a number of external researchers (Panteia, SAMR, WIK Consult and Telecompaper). After a public consultation, the decision will need to receive clearance from the European Commission. After a dispute over its previous analysis on the extent cable should be considered in the decision, the ACM has worked hard to avoid a rejection this time, citing numerous previous EC decisions to provide support for its proposal. 

Telecompaper has reported extensively already on the draft decision and market responses, and in this article we provide our first analysis. The 364-page decision will undoubtedly generate further comment and news in the weeks ahead. 

ACM versus KPN

Open cable may already be a reality in Denmark and Belgium (and on a regional basis in the Netherlands until 2015), but the ACM's decision will still attract significant attention across Europe for imposing access to cable based on joint dominance, a concept gaining attention in recent years as the liberalised telecom market matures. Surprisingly the ACM expects to be able to complete this process within a few months, while the market players are lined up against each other and ready to play each other off against the ACM. KPN is hoping for a 'win-win-win': if it can reach agreement on VULA with the market, then not only does it benefit but also the challengers, while VodafoneZiggo could remain unregulated. 

The ACM and KPN are directly opposed, albeit that no so long ago KPN was opposed to providing access to its network (Tele2 was considered a parasite), only to change its position. Tele2 is now considered a partner, and KPN has voiced support for regulation. Nevertheless, differences remain with the ACM:

  • Competition. KPN sees the current market as very competitive. The ACM sees a duopoly with the associated risks (collusion, etc.).
  • Trust. KPN wants to show trust by accepting regulation and voluntarily seeking long-term wholesale deals with challengers. The ACM does not trust the duopoly ("two is not enough" has been the statement for years): if there is already competition, then KPN and VodafoneZiggo have an incentive to coordinate their behaviour. 
  • Symmetry. KPN always supported symmetric regulation but has now become a backer of asymmetry. The ACM has embraced symmetry in the proposed regulation, with the same rules for KPN and VodafoneZiggo.
  • Chaos. KPN predicts a long period of chaos on the market if the ACM's plans go ahead, depressing investment. The ACM aims to complete the process and have the regulation in effect already by this summer. 

Open cable: far-reaching effects

What would be the consequences for an open cable network at VodafoneZiggo? Difficult to believe it can happen in three months, after which the technical implementation will need to be organised. Opposition, lawsuits, the EC's input, fixing tariffs and then getting the network ready for wholesale will all likely take years rather than months. Some of the initial implications include:

  • The wholesale market was always reserved for KPN. Now VodafoneZiggo will get a piece. This introduces competition on the wholesale market, as we've already seen in mobile. MVNOs switch networks when they can get a better deal, and that will be the future for the fixed market as well. 
  • A new category of competitor. In addition to VodafoneZiggo, KPN and the challengers on KPN's network, we will have challengers on the VodafoneZiggo network. The arrival of the new competitors will undoubtedly lead to price pressure in the retail market (in the cable segment at least) and shifts in market share.
  • VodafoneZiggo will face new costs. 
  • VodafoneZiggo does not have national coverage, so KPN will still have a small advantage. 

Challengers: playing KPN off against the ACM

It's questionable whether the current wholesale customers at KPN are satisfied. T-Mobile Netherlands moans openly, and Tele2 is squandering its fixed network, suggesting there's little to be earned there. This makes it doubtful whether KPN could agree new VULA deals with the challengers. They could play KPN off against the ACM: only with extremely good VULA tariffs would they be willing to enter a seven-year contract with KPN. Otherwise, the ACM will set the rates, pulling the rug out from under KPN's alternative proposal. 

In short, KPN may find it very difficult to reach new VULA deals. If it does succeed, that means all the market players are in opposition to the ACM's analysis. 

KPN: FTTH threat

KPN is doing alright with a FTTH network with 30 percent coverage, a sign of a healthy market. That it hasn't been growing much for a couple years works out very well for the company. KPN says if the cable network is really opened up, years of chaos will be the result. That means uncertainty, which means a poor investment climate. Between the lines, KPN's message for the ACM is: take our proposal seriously, forget about the wholesale broadband access plan, embrace our idea for partial deregulation and then we'll start up the FTTH expansion again. 

As cable is getting ready for Docsis 3.1 and KPN almost has a new CEO, this is a natural moment to restart the FTTH network roll-out. The ACM already notes that KPN is likely to choose the cheaper variant NG-PON2. The questions is whether the ACM is vulnerable to this subtle form of blackmail. 

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