T-Mobile Netherlands: back to growth within 2 years?

Wednesday 4 March 2015 | 11:59 CET | Background

T-Mobile Netherlands reported an 11 percent decline in revenues in its latest quarter, while parent company Deutsche Telekom said it aims to stabilise revenues at its European operations by 2016-17. What's driving the drop in sales? And is it realistic to expect a turnaround to growth within two years? It appears a difficult task, but the operator's focus on mobile data offers a chance.

The drop in revenues worsened to 11.4 percent in the fourth quarter, the weakest performance since Q4 2012 (-11.6%). The fixed broadband unit Online is no longer included, and part of the drop is due to the sale of the Simpel brand in August 2014. T-Mobile also pointed to price pressure and lower out-of-bundle revenues. The loss of customers also played a role of course. T-Mobile has been losing customers continuously since Q4 2012.

Service revenues fell only 2.5 percent, the smallest drop since Q2 2012, while ARPU actually increased. This shows the impact of fewer customers: despite higher ARPU, service revenues are still lower. On its own, the higher ARPU is very positive and shows the benefits of a continued migration from prepaid to postpaid and to bigger data plans. If T-Mobile is able to halt the loss in customers, this will contribute directly to growth. However, its stated plans for focusing more on the Ben low-cost brand could result in pressure on ARPU.

T-Mobile named a number of focus ares that are expected to contribute to growth. Notably cost savings is not one of these. Its recent increased focus on wholesale (particularly the cooperation with Tele2) has already increased the EBITDA margin to a record 42 percent. Free cash flow is also at record levels, so Deutsche Telekom should be satisfied. Revenue growth is expected to come from a focus on 'high-value, data-driven customers', the Ben brand (for the 'no-nonsense' segment), expanding the LTE network and the cooperation with Tele2, which should continue to benefit wholesale revenues.

The risks are already well-known: competition of the main brand with KPN and Vodafone and competition for Ben from Tele2, Telfort (KPN), Hollandsnieuwe (Vodafone) and the MVNOs. In addition, Tele2's imminent launch of its own mobile network could result in increased price pressure, as could Ziggo's 'Wi-Fi first' strategy.

Taken all together, it's highly questionable whether T-Mobile can reverse the sales trend in two years. Telecompaper expects a continued contraction in the coming years. Revenues from voice and SMS are under pressure, and data growth is not fully compensating. Deutsche Telekom is developing some interesting plans, announced in the run up to the Mobile World Congres. It noted the importance of 5G, embedded Sims and the integration of fixed and mobile networks. And ahead of Cebit, DT underlined the importance of telecom services for the industrial sector. DT's strategy also focuses on stimulating data usage, both with its own services (such as the new myKidio app) and with over-the-top services from others (eg partnerships with Twitter, Evernote and Airbnb).

Price elasticity can also contribute to growth: a small drop in prices can lead to a big jump in volume, leading to a net increase in revenues. If such a strategy is successful, the whole mobile sector could profit. The question then is whether the pie is getting bigger and do we continue to consumer more data (fixed or mobile)? Or does the growth come only at the expense of data traffic on fixed networks? This may be a question for the longer term, but given T-Mobile NL is mobile-only, it will not be troubled.

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