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General

Tele2 NL to benchmark pricing against T-Mobile, Vodafone

Thursday 23 July 2015 | 10:25 CET | Background

Tele2 Netherlands did not make a good impression with its second-quarter results. Fixed telephony has contracted so much it can no longer be considered a cash cow, the number of fixed broadband customers has fallen to the level of Q3 2008, and mobile net additions totaled just 7,000. It's clear the company's focus is completely on rolling out its LTE network. On the positive side, the roll-out is on track to reach national coverage in Q1 2016 and Tele2 has also reached a new deal with KPN on access to its VDSL network (in addition to ADSL2+ and FTTH). We expect Tele2 to launch a new marketing push in late 2015, targeting both T-Mobile (in mobile) and Vodafone (in fixed). The question is whether that will be enough to start growing its market share. 

Own infrastructure

In mobile Tele2 is evolving toward the status of MNO, with its own LTE-Advanced network. As an extra advantage, the company has its own fibre backhaul and a site-sharing agreement with T-Mobile, helping to reduce costs. The company estimates it can save as much as 85 percent on costs. However, first it needs to spend on rolling out the network, and capex is reaching new heights at the company. Before it had its own spectrum licence, Tele2 NL would spend a few hundred thousand euros each quarter on mobile, whereas now it's investing in the tens of millions. The licence alone cost EUR 160 million and in total it's invested around EUR 200 million in LTE. By the time it reaches completion, the nationwide roll-out will likely cost EUR 250-300 million. This still appears a very reasonable cost to become a MNO.

It's more difficult to replicate that model in the fixed market, where building its own FTTH network is probably a step too far. However, the recent Vula agreement with KPN and its own fibre backbone means Tele2 can operate from a low cost base.

Differentiation

Tele2 is ambitious, and the Dutch company is evolving in line with its parent's strategy (the name says it all - to be number 2). From carrier select via its own fibre backbone and MVNO to a MNO and unbundler on FTTH. If it doesn't work with Tele2 NL, then the raison d'etre of the whole Tele2 Group is up for question. It has already set very high targets for the Dutch market: 20 percent in mobile, 15 percent in broadband and 10 percent of the business market.

Are these targets realistic? At the moment it only has a share of a few percent. Tele2 hasn't set a timeframe for achieving the targets, but these goals only have meaning when they are truly achievable. The problem is that Tele2 is facing a saturated market in all these segments, with four very present 'incumbents': KPN in all markets, Ziggo in TV, and Vodafone and T-Mobile in mobile.

Tele2 has a few ways to ramp up its growth:

  • Service differentiation. This may be difficult, but smaller players are showing the way, for example Fiber Nederland with its recent launch of a smart home system.
  • Acquisitions. These can't be ruled out; Tele2 has been saying for some time "we're buyers, not sellers". There are still a handful of small, independent ISPs in the Netherlands (Caiway, Solcon, Fiber NL etc.).
  • Price. This is the most important variable for Tele2 NL. It's already noted the "window of opportunity" in the Netherlands provided by the relatively high prices and low usage of mobile data. Nevertheless, Telecompaper's own semi-annual EU Benchmark report comparing mobile data prices shows that the Netherlands scores in line with or even cheaper than the European average. This still leaves some room though, as Tele2 is more likely to model itself on the cheaper countries, like Sweden and Finland, than the average or more expensive markets (Greece and Portugal).

Tariffs

It seems clear that Tele2 will make a new attack on the Dutch market late this year, possibly even in all its market segments (fixed and mobile, consumer and business). By that time it will have its own infrastructure in place, although the costs of the MVNO deal with T-Mobile will not disappear immediately, as some voice and data traffic will still go over T-Mobile's 3G network. Not all its customers have phones yet that support 4G and VoLTE. 

Most likely Tele2 will look to price in order to stimulate growth. Given its traditional market approach, it's not certain price will be enough. Furthermore, Tele2 is not especially known as 'disruptive'. It's too afraid of poisoning the well and losing pricing power by offering for example unlimited mobile data at a fixed price.

If we look at the Sim-only segment where unlimited calls and SMS are already offered at a fixed price, we can isolate the cost of mobile data. From this perspective, T-Mobile offers the lowest price per unit - EUR 1.71 per GB with a plan for 12 GB per month, according to our calculations. The incremental price per GB drops to EUR 1 at T-Mobile, based on the step-up from 6 to 12 GB of EUR 6 per month. This is the benchmark for Tele2 to focus on. 

On the fixed market, we can compare data costs by looking at internet-only plans. Limiting the comparison to the highest speeds over FTTH, we find the following prices:

  • KPN: 500 Mbps for EUR 55, one-time costs EUR 35.
  • Vodafone: 500 Mbps for EUR 50, one-time costs EUR 100.
  • Jonaz in Leusden: 500 Mbps for EUR 40, one-time costs EUR 40.
  • Netrebel in Houten: 1,000 Mbps for EUR 37.50, one-time costs EUR 40.
  • Lomboxnet in Utrecht (ETTH): 140 Mbps for EUR 50, no one-time costs, free speed upgrade for one year, free data storage of 60 GB.

On price per unit, Netrebel is the cheapest, at 4 cents per Mbps per month, followed by Jonaz (8.3 cents), Vodafone (10.9 cents) and KPN (11.3 cents). In this segment, Tele2 will also want to maintain pricing power and is unlikely to introduce straight away 1 Gbps. It is more likely to follow Vodafone's pricing than Netrebel's. 

The price comparisons show there is room for promotional activity. However, Tele2 is unlikely to do this, even though it can like no one else: a relatively large share of its infrastructure is in its own hands and it can pass the cost savings on to customers. Furthermore, it's installed base is still small, so the risk of cannibalisation is limited (ie, existing customers all moving to the cheaper plans and eroding revenues). Given Tele2's nature though, it's more likely to use T-Mobile as a benchmark in the mobile market and Vodafone in fixed. We will wait and see whether this is enough to win it a greater market share. 



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