KPN chooses VDSL and dividend over FTTH

Monday 31 August 2015 | 14:37 CET | Background

KPN is shifting its focus from FTTH to copper. At the same time, CIF's attention is moving from urban to outlying areas. How to explain KPN finding FTTH too expensive while CIF sees room for bringing FTTH even to rural areas? KPN is choosing copper with a near-term vision of dividends and withdrawing capital from telecom. CIF on the other hand sees an interesting business case for fibre. 


Since its acquisition of the first stake in Reggefiber in 2008, KPN's vision was clear: fibre will eventually be everywhere, but given the long transition period, the copper network should also be upgraded. This vision seems to be disappearing since KPN took full control of Reggefiber last year, and KPN's focus is shifting mainly to copper. KPN is rolling out technologies such as VDSL, bonding and vectoring and testing a number of others like super vectoring or Vlpus in order to deliver hundred of megabits per second. KPN supports this move with financial arguments: it wants to minimise investments (capex) and maximise dividends. As a result, FTTH is relegated to the background, as the roll-out costs are high. KPN can choose this path as it's a listed company, and many investors will welcome the decision. The question is whether this strategy also will benefit the company in the long term.

Why doesn't KPN completely embrace FTTH? It appears a logical consequence of its technology choices and financial policy. KPN doesn't put it quite the same, focusing on the technological advances in copper networks in recent years, which offer the promise of speeds up to 400 Gbps. This makes speeds over 200 Mbps possible with both FTTH and copper, according to the company. Every year it looks at what the most efficient way is to offer the best customer experience. This determines how much FTTH and FTTC is rolled out in combination with new copper technologies.

We see several reasons why KPN hasn't given up on FTTH:

  • In some cases the quality of the copper network is not sufficient to apply advanced technologies. The city of Haarlem is a good example: it's mainly working with copper, except in areas where copper is too weak.
  • The cost of FTTH maintenance is tens of percent lower than copper.
  • Only FTTH is growing. Even cable is losing ground on the broadband market at the moment. This is in part due to a good wholesale market, in which customers such as Vodafone, Tele2 and M7 support high margins and ensure a high utilisation rate on the network.
  • Last but not least: PR. If KPN were to abandon FTTH, a public debate would ensue, with questions raised in parliament. In part thanks to Reggefiber, FTTH has become the reality in large parts of the Netherlands.

CIF: from city to countryside

CIF's strategy is clear. In the first phase after it was created, CIF acquired a number of small cable companies and then proceeded to deploy fibre alongside their coax networks. By buying cable networks, CIF eliminated an important competitor and was cash flow positive from day one. This phase is largely complete, despite not yet using all the fund's investment resources. Ziggo is not for sale, so there remains just one choice for CIF (at least within the Netherlands): expand outside the cities. In these areas, there is no cable, and KPN (or satellite internet) does not offer serious competition. Of course the capex is higher, but this problem is solved by a financing model that has residents make a contribution to the network costs. CIF has learned over the years how to efficiently deploy FTTH. This combined with its new financing model offers a solid story for the investors in the fund (a number of pensions funds).

Risks of focusing on copper

KPN may be making the right choice; only time will tell. We note a number of risks though:

  • Cable is getting ready for Docsis 3.1 and will introduce gigabit speeds next year. As we've noted before, Ziggo faces pressure to grow given its leveraged balance sheet, and the pressure is only increasing on the company after some poor recent quarters. Cable operators can use the faster speeds as a marketing point.
  • The new technologies in copper promise a nice maximum speed, but the question is what are the real speeds delivered. The speeds are still highly dependent on distance. This may be reduced by deploying new fibre rings, resulting in a smaller average distance to the end-user.
  • KPN is likely to have to deploy fibre anyway in a few years in order to compete with Ziggo. This limits the time to earn a return on the investments in copper.
  • KPN may be focusing too much on the capex advantages of copper and too little on the opex savings of FTTH. The operational savings may be the most important reason to roll out FTTH, more even than the higher speeds. The copper network can be shut down in areas where FTTH is available. In addition, the large capacity of FTTH opens up wholesale opportunities that can increase network utilisation and margins. The wholesale partners together with KPN can form competition for cable. Copper is a choice for the short term, which can create problems in the long term.

Negative sector view

Choosing the optimal mix of copper and fibre is difficult. Reducing the focus on FTTH brings risks. A new phase in the broadband market may start next year, in which Ziggo starts winning market share at KPN's expense. KPN sees rolling out FTTH as part of its modernisation efforts, under which costs must be minimised. By focusing on the dividend, KPN is giving off a negative signal about the telecom market: withdrawing the most possible capital rather than investing to the maximum.

There may be another, more positive view of the sector. With a greater focus on the long term, KPN may take a different view on FTTH and see it as an attractive business case. This could lead to a bigger capex buget. The same as CIF, a choice for FTTH means KPN could benefit from removing a competitor (copper) while taking advantage of its existing customer base and cash flow. 

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