KPN, Ziggo and Tele2: OTT competition drives focus on LTE, FTTH and Wi-Fi

Friday 25 October 2013 | 15:40 CET | Background

The results season is in full swing, and KPN, Tele and Ziggo have all reported Q3 figures. KPN's results were not good; out of the revenue lines reported by the Dutch incumbent, only Consumer Residential and E-Plus were growing, and E-Plus will soon be sold. At the EBITDA level, only Consumer Residential showed growth. The reasons are well known: price pressure from competition, delayed orders from clients due to the weak economy, regulation, and above all, the transition to 'new' services.

That last reason is the most worrisome. On its own, new technology is a good thing, as it usually leads to new services and lower costs, even if some upfront investment is required. The problem is the legacy revenues of traditional players come under pressure from the new technology and the subsequent arrival of new market entrants. A few examples:
  • Tele2 will have no legacy to deal with when it launches 4G soon. It does have a MVNO on the T-Mobile 2G/3G network, but has been using this since 2012 mainly to build up its customer base before launching its own 4G network (likely in the course of 2014). It has roughly doubled its mobile customer base in the past two years to 640,000.
  • Ziggo has a quasi-mobile strategy based on Wi-Fi. Apart from that, it's just a MVNO.
  • KPN had nothing to lose on the TV market once its network was able to carry digital TV, raising all kinds of subsequent problems for analogue cable TV. Of all the analogue cable customers switching to digital TV, only some stay with the same cable operator. At Ziggo, this rate of conversion was as high as 70-80 percent but has fallen since Q2 2012 and hit zero in Q4 2012. In the past quarter it managed to recover to 50 percent.
  • The managed services from telecom operators (voice, SMS) and cable companies (TV, VOD) face compeition from over-the-top providers, such as Skype, Viber, WhatsApp, Facebook and Netflix.

In short, the arrival of 4G, Wi-Fi, digital TV and OTT services is creating a new category of competitors. In the first example, a new MNO is claiming a piece of the cake, in the second case, the cake is shrinking, in the third, the cable market is shifting to telecom, and in the last example, the telecom cake is getting smaller due to the rise of OTT. This last shift is probably the most painful, with people throughout the telecom sector struggling to find an answer. Wi-Fi and OTT are all the more difficult to compete against as they are often offered free. 


The view above leaves KPN with everything to lose. But its becoming clear that KPN has it own answer to the OTT threat: connectivity. Broadband that is, whether it be fixed or mobile. With LTE, KPN was so keen that it started its roll-out before the spectrum auction was even completed, in December 2012. As a result, it could stat testing in January and launched first in February. It already has 200,000 4G subscribers, even with the limited number of 4G phones available. Its announced cooperation with Fon still needs to result in a commercial product, but it is progressing steadily with fibre thanks to the Reggefiber joint venture. 

America Movil's bid prospectus showed that it was looking to focus KPN on infrastructure ("... investigate expansion investments that will differentiate KPN as a leading telecom service provider in its home markets."). The obstacles to the takeover were the price and America Movil's right to name the CFO. Nevertheless, it's far from written in stone that KPN needs to be acquired in order to survive. Expected synergies are very limited, and in every country where a telco is active, one can expect positive cash flow and the ability to pay its own way. The move by the Stichting Prefs KPN to block the takeover was not a problem for KPN, only for its shareholders (which may be the reason why ex-Ahold exec Peter Wakkie left the Stichting's board).


KPN noted in its Q3 report that is investing more than average in next-generation access networks: LTE, FTTH (via Reggefiber) and Wi-Fi (met FON). Ziggo and Tele2 are also paying attention to infrastructure, although they are somewhat dependent on rivals: Ziggo uses the Vodafone network for its MVNO and Tele2 has signed a site-sharing agreement with T-Mobile for 4G and uses access lines from Reggefiber for FTTH.

Ziggo has been increasing its investments for some time. In 2012, its capex totaled EUR 175 million, and in 2013 it is expected to be nearly double, at EUR 340 million. And this is despite its consumer base falling by around 350,000 in the three years to 2.68 million. This suggest that Ziggo, more than KPN, would benefit from a merger in order to achieve economies of scale. Sooner or later a bid will come from Liberty Global. Whatever the case, it's just as true for Ziggo as KPN that connectivity is the most important service it has to offer. While we haven't heard that in so many words from Ziggo, it's clear from its results: since Q1 2013, broadband is its biggest revenue generator.

Tele2 NL has kept its capex budget more under control. It makes use of its existing infrastructure (backbone) and its cooperation with T-Mobile and Reggefiber.

Customer satisfaction

A side effect of all the transitions in the sector is that customer satisfaction has started to suffer (see Telecompaper's research on net promoter scores). Tele2 NL acknowledged this openly in its Q3 report and said it's taking action. At KPN, the attention is on simplifying (its current strategic plan to 2015 is entitled 'Strengthen, Simplify, Grow'). This applies to the product portfolio, as well as processes, the network and IT. The aim: lower costs (opex and capex), a shorter time-to-market for new services and higher customer satisfaction.

Dissatisfied customers are not uncommon in the telecom sector, but since the creation of Ziggo, no major complaints have emerged. The story is different at UPC, which has struggled to get its Horizon set-top box working for customers.


New technology means new competition, and especially the OTT sector is a threat. Existing players are arming themselves by putting a new focus on infrastructure: LTE, FTTH and Wi-Fi.

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